CAIRO (Update 5) - Egypt's currency slipped to a fresh low and the cost of insuring Egyptian government debt jumped after protesters rejected an army offer to speed a transition to civilian rule, insisting that the military quit power now. An end to nine months of economic turmoil and policy uncertainty since the overthrow of Hosni Mubarak looks even more distant after violence flared in Cairo this weekend and spread to other cities. Foreign investors mostly exited Egypt after Mubarak was ousted and the selling this week has been mostly by local investors buying dollars to hedge against the risk of a sharp drop in the pound, dealers said. "The pound is going to continue to devalue against the US dollar and we think yields on treasury bills are going to head as high as 15.5 or 15.7 per cent," said a Cairo fixed-income trader. "If the situation in Tahrir drags on, this will have a long-term impact on Egypt's ability to win back foreign investment," the trader added. The pound, which this week was already trading at its weakest since January 2005, was bid as low as 5.9994 against the dollar compared to 5.996 on Tuesday and 5.807 before the January uprising against Mubarak. Egypt's foreign exchange reserves have tumbled to $22 billion last month from $36 billion in January as the political turmoil withered economic growth and foreign investors fled. Analysts say the central bank supports the pound indirectly through several local banks and is loath to allow it to breach the psychological barrier of 6.00 to the dollar. Egypt's five-year credit default swaps rose 18 basis points to 560, their highest since March 2009, Markit said. The yield on a dollar-denominated Egyptian government bond was 6.6184 per cent, up from 5.93 per cent a week ago. The central bank reduced the size of a treasury bill auction on Sunday as the average yield on 91-day bills shot up to 13.49 per cent, its highest since Sept. 30, 2008, from 12.781 per cent at last week's auction. The interim government that resigned this week had been trying to attract foreign loans to fund a budget inflated by state wage increases since a wave of public sector strikes. Egyptian stocks recovered some of their losses on Tuesday, when the main index slumped 4.7 per cent to a 2-1/2 year low. The index had fallen 12 per cent since protests began on Friday. "As long as the Tahrir Square problem still exists though, the rebound will be short-lived," said Taher Mohamed, an equity trader at Cairo Capital Securities.
