SPENGLER Failed treasury auction
portends Egyptian
disaster By Spengler
Investors bought less an a third of the
3.5 billion Egyptian pounds (US$580 million) worth
of Treasury bills offered to the market on January
22, a red flag warning that Egypt's foreign
exchange position is close to the brink.
Yields on Egyptian government debt
maturing in nine months jumped to nearly 16%, but
the government could not place its local-currency
debt to Egyptian investors, even at that
exorbitant rate.
This is a new and ominous
decline in the financial position of the most
populous Arab country. I have been warning since
last May that "Egypt is running out of food, and,
more gradually, running
out of the money with
which to buy it." How fast this may occur is hard
to specify, but the government's inability to
borrow on money markets suggests that the crunch
is not far off. (See The
hunger to come in Egypt Asia Times Online, May
10, 2011.)
Interest rate on
Egyptian 9-month treasury bills Source:
Bloomberg
Egypt faces a disaster
of biblical proportions, and the world will do
nothing about it. Officially, Egypt's foreign
exchange reserves fell by half during 2011,
including a $2.4 billion decline during December -
from $36 billion to $18 billion, or about four
months of imports.
But the situation
almost certainly is worse than that. More than $4
billion left the country during December,
estimates Royal Bank of Scotland economist Raza
Agha, noting that the December drop in reserves
was cushioned by a $1 billion loan from the
Egyptian army and a $1 billion sale of
dollar-denominated treasury bills.
The
rush out of the Egyptian pound is so rapid that
Egyptian investors refuse to hold debt in their
own national currency, even at a 16% yield. After
Islamist parties won more three-quarters of the
seats in recent parliamentary elections - 47% for
the Muslim Brotherhood and 25% for the even more
extreme al-Nour Party - the business elite that
prospered under military rule is counting the days
before exile.
The first reports of actual
hunger in provincial Egyptian towns, meanwhile,
are starting to trickle in through Arab-language
press and blog reports. A shortage of gasoline
accompanied by long queues at filling stations and
panic buying was widely reported last week.
In some towns, for example Luxor in Upper
Egypt, the disappearance of diesel fuel shut down
bakeries, exacerbating the spot shortages of
bread.
After months of refusing to bargain
with the International Monetary Fund (IMF),
Egypt's government has begun negotiations for a
$3.2 billion loan, or less than the amount of
capital flight in December alone. The involvement
of the IMF evidently did little to reassure the
Egyptian investors who sat out Sunday's Treasury
auction.
It seems unlikely that Egypt's
central bank will be able to prevent a
banana-republic devaluation of the Egyptian pound,
and a sharp rise in prices for a population of
whom half barely consumes enough to prevent
starvation. The difference between Egypt and a
banana republic, though, is the bananas: unlike
the bankrupt Latin Americans, who exported food,
Egypt imports half its caloric consumption.
Meat imports have already fallen by 60%
over the past year, the Egypt News website
reported on January 22, [1] reflecting the
collapse of purchasing power. More alarming is
that bread has become scarce in some provincial
cities. In Ismailia on the Suez Canal, the Youm7
website reported on January 22, a bread protest
burned cars and blocked a main highway. Similar
protests took place in other towns close to Cairo,
including Zagazig and Ibousoar.
Anything
that can be sold for hard currency - wheat, rice,
butane, diesel fuel and sugar - has disappeared
from government warehouses during the past year,
according to a multitude of reports in local
Arab-language media summarized in my 2011 essays.
(See When
will Egypt go broke? Asia Times Online, July
12, 2011.)
It is not clear whether the
localized shortages of food and the nationwide
shortage of gasoline reflect a buyers' panic, or
large-scale theft, or an effort by the central
bank to conserve foreign exchange by slowing
essential purchases - or all of the above.
Nearly half of Egyptians are functionally
illiterate. Nine-tenths of adult women have
suffered genital mutilation. Almost a third of
Egyptians marry first or second cousins, the
fail-safe indicator of a clan-based society. Half
of Egyptians live on less than $2 a day, and must
spend half of that on food.
Under duress,
and after the collapse of the secular military
dictatorship that ruled Egypt since the Free
Officers coup six decades ago, Egyptians naturally
revert to traditional institutions: mosque, tribe
and clan.
It should have been no surprise
that the Islamists swept the parliamentary
elections, given the desperation of the people and
the cupidity of the political system. The Wafd
Party, Egypt's oldest secular political entity,
polled just 9% of the vote.
Delusional as
it was to expect Egyptians to support secular
liberal parties that never existed and offered no
solution to their desperation, it is all the more
delusional to expect the Islamists to stabilize
Egypt. The Islamist victory in the first round of
voting last year almost certainly prompted the
jump in capital flight in December, and the
consolidation of Islamist power.
Egypt's
middle class will leave and tourism, down by a
third over the past year, will virtually disappear
in response to Salafist restrictions. The Barack
Obama administration in Washington will try to
appease the new Islamist government whenever it
takes power, but will succeed no better than the
Jimmy Carter administration did when the Ayatollah
Ruhollah Khomeini took power in Iran in 1979.
The European Council set the tone for the
international community's response to the Egyptian
crisis, with a statement on January 22 [2] that it
would avoid "formal dialogue" with Egypt until a
democratic government is formed. There is no point
talking to the generals, who are about to leave,
let alone giving them money, for they would simply
steal it.
Europe, however, will give
serious thought to 449 million euros (US$560
million) in foreign aid during 2011-2013, a
meaningless sum given Egypt's requirements.
The Obama administration, despite the
president's enormous personal investment in the
notion of Egyptian democracy, will do nothing
until November, by which time it will be too late
to do anything: the last thing the incumbent
president wants during an election year is to
defend an increase in foreign aid (the least
popular line item in the US budget) to Egyptian
Islamists (the least popular people as far as
American voters are concerned).
By
protesting the harassment of Egyptian human-rights
groups in a call to the military leadership on
January 20, Obama distanced himself from the mess
he helped create by forcing the resignation of
president Hosni Mubarak early last year.
The Republican establishment, to be sure,
waxed just as enthusiastic about Egyptian
democracy as did Obama, but under the
circumstances, Republican pundits will insist they
never said it.
It is sad enough for
Egyptians to stumble into a long night of hunger,
repression and anarchy; it is doubly sad that
Democrats and Republicans will do their best to
ensure that Americans learn nothing from Egypt's
failure. Not often does a great and ancient
country go to its ruin in the full light of day,
observable in real time.
What passes for
optimism - the notion that Americans can teach
their political system to everyone else as if it
were simply another technology - too often turns
into adoration of our own cleverness. Millions of
Egyptians will die before this is through. It
would be a shame if this great sacrifice taught us
nothing.
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