Egypt Default Risk Jumps to Record as Political Rift Widens

Egypt’s default risk soared to a record after a speech by President Mohamed Mursi failed to alleviate investor concerns ahead of planned nationwide rallies this weekend. Domestic debt yields climbed to a nine-month high.

Five-year contracts that protect against default by the second-most indebted Arab country rose 12.5 basis points to

887.5 at 5:06 p.m. in Cairo, according to CMA prices, the highest on a closing basis since Bloomberg started tracking them in 2009. The country’s risk, among the highest 10 in the world, for the first time climbed above that of Pakistan, which has the same junk rating of Caa1 at Moody’s Investors Service.

Pro- and anti-government camps plan rallies for June 30, when Mursi marks one year in office. The president in a nationally-televised address last night blamed the nation’s crisis on an opposition that has rejected his calls for talks. Clashes between his supporters and opponents, who accuse him of consolidating power and failing to revive the economy, have injured hundreds this week and killed one person.

“Rather than seeing a consensus over how to move forward, the weekend’s protests point to policy paralysis and political polarization,” Simon Williams, chief Middle East and North Africa economist at HSBC Holdings Plc in Dubai, said by e-mail today. “You can hardly be surprised the market is worried. Growth is poor, inflation is high, the currency is weak and public finances are deteriorating.”

‘Fresh Bout’

The yield on the government’s benchmark $1 billion of 5.75 percent eurobonds due 2020 retreated 22 basis points after hitting a record 10.24 percent yesterday, according to prices compiled by Bloomberg.

The North African country’s external debt stood at $38.8 billion at the end of 2012, or 14.1 percent of economic output, according to Finance Ministry data. Domestic debt reached 1.4 trillion Egyptian pounds ($198 billion) in March, or 80 percent of gross domestic product, the data show.

Local-currency government debt slumped at an auction today, pushing the average yield on 4 billion pounds of 1 year T-bills up 50 basis points to 15.41 percent, according to central bank data on Bloomberg. The yield on 2 billion pounds of 6-month notes advanced 35 basis points to 14.82 percent. Both levels are the highest since September.

Demand for one-year securities was at 1.3 times the amount offered, compared with more than 2 times in April, according to data compiled by Bloomberg.

The 267 basis-point, or 43 percent, surge this month in Egypt’s CDS compares with an average increase of 59 basis points to 327 of 10 countries in the Middle East. CMA is a data provider that is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

“There’s simply no clarity on how Egypt’s political standoff will play out,” Williams said. “At best, policy making is likely to be undermined by the tense political environment. At worst, there is a clear risk of a fresh bout of serious unrest.”

The Egyptian pound retreated 0.1 percent to 7.0194 a dollar following a central bank auction at which 19 percent of demand for the U.S. currency was met. That takes the pound’s decline since the regulator started the auctions in December to 12 percent.

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