The twin debt crises in the US and Europe are sending shivers in economies around the globe. Sherine Abdel-Razek finds out how Egypt is being affected It started in the US again and this time it is not about a bank like Lehman Brothers defaulting; it is about the creditworthiness and credibility of the world's largest economy stumbling with Standard and Poor's (S&P), the American rating agency, downgrading the state's creditworthiness to AA-plus from AAA, a move that over time could ripple through markets by pushing up borrowing costs and making it more difficult to secure a lasting recovery. Parallel to this, Spain and Italy, reminding the world of last year's Greek scenario, seemed to be on the verge of default with yields on Italian and Spanish debt soaring to 14-year highs on political wrangling and doubts over the vigour of budget cuts. The European Central Bank's assertions that it will intervene failed to calm fears in world markets. According to Reuters, as of Monday, stock losses had wiped some $3.8 trillion from investor wealth globally in the recent rout as buyers rushed for perceived safety in the Japanese yen, the Swiss franc and gold, which hit another record high on Tuesday. Economies worldwide are afraid that a new financial crisis is looming with the rich economies heading into recession and the world leader, the US, contributing by 23-25 per cent to the global GDP, is tightening its spending to buy the consent of rating agencies to hedge against more depreciation in its currency. The lowering of the US long-term sovereign credit rating has sounded a warning bell for the international currency system dominated by the US dollar amid fears that the green backed currency would lose more ground. In Egypt, many observers sounded concerns that a depreciation in the dollar would lead to a severe decline in the value of Egypt's international reserves, denominated in dollars, and strip off the Egyptian government investments in American treasury bills. However, there is another side to the story. So far, the S&P downgrade does not seem to be having too much of an impact on US government bonds, known as Treasuries. "Theoretically, the downgrade should prompt investors to ask for a higher yield to compensate for the higher risk, but the yield on 10-year Treasuries has actually fallen," said Hani Genena, chief economist at Pharos Holding. This, according to Genena, means that the situation is not as bad as it initially seemed to be and that investors still trust the economy of the US and thus Egypt will not together with the rest of the world witness the effect of a big collapse. "Come on, at the end of the day it is still an A rated country and the whole world sees its treasury as the safest haven and the most liquid market." He added that, while the value of Egypt's investments in the US treasury bills is unknown, "we can sell it out any time and very easily as it is the easiest to liquidate worldwide. We also must have trust in the efficiency of the reserves management department in the Central Bank of Egypt," he said. Moreover, Genena agrees with Mohamed Abu Basha, senior economist at EFG Hermes, as he points out that there is no major impact on reserves as "we are not integrated in the global economy and that of the US like China or South Korea which hold trillions of dollars in reserves and invest heavily in American treasury bills." Furthermore, Egypt's finance minister, Hazem El-Beblawi, said Sunday that foreign reserves are not only in dollars and that the basket of international reserves is quiet varied. While Washington's Asian allies are showing support to the battered superpower, with Japan and South Korea both saying their trust in US Treasuries remain unshaken, Gulf countries are not being less faithful. The United Arab Emirates said on Sunday it will keep its currency peg to the US dollar even after the downgrade, and Oman stressed that it sees no risk in investing in US treasuries. All Gulf Arab states, except for Kuwait, peg their currencies to the greenback and their fortunes are closely tied to US developments. Gulf states are also major investors in US treasuries. Fears that the problem would lead to a depreciation in the dollar value are not groundless, but according to Genena, they are not new. "The green backed currency has been depreciating versus gold and the euro for about four years now," he explained. An ounce of gold used to cost $400 in 2007, while now it costs around $1,700. The dollar also lost almost 40 per cent of its value to the euro since the latter saw light. From his side, El-Beblawi believes that if the dollar loses some ground, this would be in favour of Egypt whose foreign debts are in dollars, and thus a drop in value would not be harmful. The largest loser from the last week's events is the stock market which lost on both Sunday and Monday around six per cent of the value of its main index EGX30 that is before the trading was suspended on Tuesday morning after it lost five per cent in the first trading hour. "I don't think we need an explanation -- we are just following the global market," said Ashraf Akhnoukh of CIBC brokerage to Reuters. "The drop of six per cent in the US is like our market being down 20 per cent." The S&P 500 index in the US closed down 6.6 per cent on Monday, suffering its worst day since December 2008. The drop came amid a broader slide in the value of emerging markets assets to their weakest in more than a year, pushed lower by higher- than-expected Chinese inflation numbers, which followed the weekend's US credit rating downgrade. But still, "it is normal for our market to fluctuate in reaction to international events," said Abu Basha. Acting chairman of the Egyptian stock exchange, Mohamed Abdel-Salam, commented on Sunday's market decline of four per cent, pushing the market to its lowest level since 2009, as unjustified and triggered by individual investors panic selling after they see foreigners abandoning the market to make up for losses they incurred back home. As for the problems in the Euro zone, Abu Basha sees it as a second phase of what started a year ago with the Greek problem, and its impact will be a continuation in Europe's growth rate, a factor that already is weighed in all Egypt's transactions with the continent. "What we should be worrying about now is not what is happening in the rest of the world; the instability inside the country should be our major concern," according to Abu Basha, who echoed what El-Beblawi highlighted on Sunday by saying that the country will be facing a liquidity problem that might lead Egypt to resort to international borrowing again. In the six months that followed the uprising, Egypt lost LE40 billion ($6.7 billion) in foreign investment in treasury bills. Meanwhile, Egypt's foreign reserves decreased by $863.0 million, in July 2011, to reach $25.7 billion. This brings the total decline in foreign reserves to $10.4 billion during the first seven months of 2011.
