Banking on Debt

Advice, information and discussion about Egypt in general.

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Banking on Debt

Post by Hafiz »

Moody’s Bank Ratings ... 408_KI.pdf


The so called experts say Egyptian government banks are B3 (right in the middle of the junk rating with a long way to go to get out) because the Central Bank of Egypt will bail them out (if it has any money) just as it has on a number of other times. Don't put your money in an Egyptian bank - as 50-60% of Egyptians avoid them too.

Country rating is a different category but your banks can’t be better rated than your country so it is B3 for Egypt which places it with Zambia, Pakistan, Ecuador, Gabon.

Some countries are considerably and surprisingly better – B1 Tunisia, Ethiopia, Sri Lanka, Vietnam. This invariably means they are better managed by sensible people who can add up.

Even Morocco is better at Ba1 and Bangladesh is better at Ba3 and the superbly run but not very rich Botswana at the high A2. Poor Cambodia is better at B2

Cyprus is junk rating and putrid with Russian money. Something that will soon happen in Egypt and not just on the tourism front but with their Free Trade Zone or worse.

Israel at A1 is one of the highest in the world showing the regional diseases are not contagious. In an indirect way the ratings are a judgement on competence as well as circumstances.

Egypt’s buying spree of the past 5 years is not only billions in military hardware but lots of debt. Its international debt has more than doubled in 4 years to $US80 billion (I think its more)

Egypt raised a further $US4 billion in London in February (5.5%-8.0%) and whilst demand was high there are now published views that the total debt is too big and that a crisis is looming. What can one say. (The underwriters of the debt had boards dripping with Jews and thousands of staff the same. Egypt should tell its population this and hand the money back.)

The debt is planned and managed by the superb Central Bank of Egypt that defended the currency and the perfect banking system during Mubarak and is therefore incapable of mistakes as are the world class Cabinet members. ... lions.html

In addition the Egyptian International Cooperation Minister Sahar Nasr recently borrowed (possibly at the last moment) $US3 billion from the International Islamic Trade Finance Corporation (Saudi probably government) to pay for imported food and other shopping. Conditions and interest are a secret which is odd. Another $US400 million was raised in early February from the same to pay for oil. This strikes me as bizarre and a sign that there is a fire inside the house. Borrowing capital to pay food bills – really. An ex-World Bank economist (not a very good one) is breaking all the rules of economics and accounting 4 years into the ‘highly successful’ reform program.

A local expert said this about the debt situation:

“Wael al-Nahas, an economic adviser to a number of investment institutions, criticized the government’s increasing foreign debt and cautioned that future generations would bear the burden of it. According to Nahas, a sustainable solution to Egypt's economic crisis requires the government to develop its own financial resources — that is, industrial, agricultural and tourist projects to generate income — rather than continuing to borrow money. He warned that the government could plunge into crises due to its reliance on short-term debt instruments, such as bonds, some of which the government has only three months to settle.”

Seems pretty obvious but I’m sure the world’s best bankers, the best Cabinet, the best leader and the best Army know better.

He also said this (he should be in the Cabinet and not a jail)

“Abdel Fattah further remarked, “The problem is that most of the debt is aimed at financing the budget deficit, importing basic commodities and increasing the country’s cash reserves in a bid to improve Egypt’s credit rating, but a part of the debt must be allocated to national industrial, agricultural or tourist projects in order to secure and develop financial resources, dispense with borrowing and contribute to the repayment of debt.”

God there are sane intelligent people in Egypt but none with any power – or freedom. So this proclaimed ‘huge’ cash reserve of hard currency is really debt not the benefits of growth/exports and sits silently in the Central Bank to delude Moody’s and others rather than put to productive/job creating/export purposes. You wonder about people’s sanity and their capacity to come up with a long term plan to save Egypt rather than just a pea and thimble one. I’m not aware of any sane place in the world that uses expensive debt to build its reserves. It costs a lot to service and just sits there doing nothing.

Relatedly for 2 generations Egypt has imported more/a lot more/a huge amount more than it has exported. Even when tourism was OK there were problems. The debt and the reserves will leak in large volumes just to pay for this gap.

The external debt (~$US80 billion but probably a lot more) is one thing but the forced loans to the Government from the domestic banking system is another. Figures are secret, Moody’s has no idea/not interested but one expert company says it is 2/3rds of total domestic credit or $US124 billion up from 1/3rd of domestic credit in 2010. That looks like a time bomb to me and means there is little left for housing loans for individuals or sensible loans to human beings in the private sector for job creating projects/farming. ... -04-01This is from The Economist Intelligence Unit an organization with a reputation few could exceed. They also don't like current arrangements one bit.

So at a minimum the government’s debts are $US200 billion, (up by 120 billion in a few years) its tax revenue base is flat because the economy is frozen, unemployment dangerously high (80% of it in younger people) he rich avoid tax and all the tax free zones on the coast pay no tax, a budget still in serious deficit, lots of 'side' debts than can't be traced, and the army’s businesses (15%-40% of the economy) pay no tax.

If the government gets into trouble the banking system will collapse. For example if the currency collapsed, remittances reduced, tourism didn’t recover, international food prices kicked off, a major war with Iran/Syria or international gas prices went down. Quite a few risks.

You wonder about the intelligence of Egyptian bankers. What sane person loans 2/3rds of assets to one client? How much of this are loans to the military is not clear. Interest rates on loans to government are not clear but are probably 12%-17% pa.

As with everything in Egypt there is a history – which is almost an identikit of the present. The borrowing orgy crisis of the 1870’s built lots of high prestige/low economic benefit projects or good projects badly managed. As most know it all ended in tears but not just a default but a colonial occupation of 60 years with the British and French running the place.

Mubarak went on a mad spending spree and ended up in 1990 with a debt of between $US100-110 billion in current money and $US15 billion in arrears. A large percentage was military spending money for the world’s greatest generals.

The IMF and World Bank forced a deal including reform of the economy – which Mubarak agreed to and then tossed except where it suited him, his corrupt family and corrupt friends.

The Western taxpayer bailed out these crooks and generals and got little for it. At this stage the E was 50% stronger than the $US now its 1/18th. It got about $US1 billion and rescheduling.

A little bit later the Paris Club agreed to cut the debt by 50% - roughly $US30-40 billion (in modern money) provided Mubarak reform the economy. They gave, he promised but did only the bits he wanted - and really slow so the money was wasted and everything went back to ‘normal’. ... d85c4f2981

The deal was a bribe to get Egyptian to support the Gulf War in which its army was asked to do little which might have been intentional. Seemed a very big price for little. Apparently their performance was timid and robotic. (Arabs at War, Kenneth Pollack p 142)

The conditions leading to this crisis are very similar to today. Rapacious debt not applied to productive purposes – eg the Army but a lot more besides, poor exports, huge imports including food, an unskilled workforce, gross government expenditure/deficits/bureaucracy, waning tourism, low productivity, bad management and too much central control. Nothing has changed. Oh the Central Bank of Egypt failed around 1990 -so I guess its possible it will fail again.

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