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Egypt Bonds Climb, Risk Declines as Country Seen Honoring Debt

Egypt’s Pound Forwards Show 5% Currency Drop in Three Months
The Egyptian pound is down 2.6 percent against the dollar over the past three months. Photographer: Daniel Acker/Bloomberg

Egypt’s bonds gained for the first time in six days and credit risk fell the most on record on speculation that the government will honor its debt payments even as protesters demand President Hosni Mubarak resign.

Egypt’s dollar bonds advanced 0.2 percent today after the notes tumbled 12 percent in January, the most since at least 2001, according to JPMorgan Chase & Co. The cost of protecting the country’s debt against default with credit-default swaps fell 70 basis points, the most ever, to 350, CMA prices show.

Vice President Omar Suleiman, appointed this week, said yesterday that Mubarak instructed him to start a dialogue with the opposition, while the military promised not to fire on marchers. The central bank holds roughly $36 billion in official foreign currency reserves, and about $7 billion in its accounts with local banks, providing resources for authorities to maintain “their historical precedence to furnish liquidity as necessary,” according to OppenheimerFunds Inc.

“‘The ability and willingness of the Egyptian government to pay its debts will remain strong,” Sara Zervos, the head of global debt at OppenheimerFunds in New York, wrote in a note. “Our base-case scenario is there will likely be some pressure on the exchange rate of the Egyptian pound, while sovereign yields on local debt are likely to be fairly steady.”

Mubarak will address the nation tonight and may announce that he won’t run for another term, Al Arabiya television reported, without citing its source for the information.

Stocks rose worldwide today, recouping losses from the Jan. 28 plunge driven by the turmoil in Egypt, as data showing expansion of Chinese and U.S. manufacturing fuel expectations that the global economic recovery is accelerating.

More Volatility

“Egypt and the broader Middle East/North Africa region is a relatively small part of the global economy and global financial markets,” Zervos wrote. “And while volatility in markets may intensify, we do not believe these events will meaningfully impact the global economic recovery or lead to a broader market decline.”

OppenheimerFunds’ holding of Egyptian bonds is in line with the benchmark it follows, according to Zervos. Egyptian bonds account for 0.8 percent of JPMorgan’s EMBI Global Diversified Index.

Hundreds of thousands protesters poured into downtown Cairo demanding Mubarak’s resignation as the political turmoil that has ricocheted through the region in the past month spread to Jordan.

Three-month non-deliverable forwards for the Egyptian pound retreated 2.7 percent to 6.25 per U.S. dollar today, the weakest level since Oct. 19. The contracts suggest traders expect the currency will sink 6.3 percent in three months, from the current 5.857 per dollar.

The stock market was shut for a third day today and won’t reopen tomorrow, Hisham Turk, the exchanges communications manager, said today. Egypt’s EGX 30 stock index plunged 16 percent last week, the most in two years.

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