Egypt Bond Yields, Default Risk Rise as Islamists Shun Cabinet

Egypt’s benchmark bonds fell, pushing the yield to a week high, after Islamists boycotted the transitional government and called for renewed protests. The country’s default risk advanced for a third day.

The yield on the government’s 5.75 percent notes due in April 2020 increased seven basis points, or 0.07 percentage point, to 8.54 percent, the highest on a closing basis since July 10, at 2:25 p.m. in Cairo, according to prices compiled by Bloomberg. Five-year credit default swaps climbed 50 basis points to 725, according to CMA data.

Interim President Adly Mansour yesterday swore in a team of 34 ministers which didn’t include any Islamists. The Muslim Brotherhood rejected the new cabinet and vowed to escalate protests to demand the reinstatement of former President Mohamed Mursi. The army forced Mursi out of office on July 3, triggering a wave of violent clashes that have left 57 dead and hundreds injured in the past two weeks. Police clashed with hundreds of Mursi supporters in Cairo today.

“The lack of Islamists in the Cabinet means a large proportion of the population is unrepresented and increases the likelihood of social unrest,” William Jackson, a London-based emerging-markets economist at Capital Economics Ltd., said by phone. “The problems facing Egypt may be larger than any new Cabinet can address. Elections can provide a government with a stronger mandate to undertake these reforms.”

Political Tension

Standard & Poor’s yesterday affirmed Egypt’s rating at CCC+, seven levels below investment grade, with a stable outlook. That’s on par with Cyprus and Jamaica, the agency’s least credit-worthy countries. The benchmark EGX 30 Index of stocks fell for the first time in four days, declining 0.3 percent as 19 shares fell.

Egypt obtained pledges for $12 billion of aid from Saudi Arabia, Kuwait and the United Arab Emirates last week, a move that Moody’s Investors Service deemed “credit positive.”

According to a transitional timeline revealed last week, Egypt will hold parliamentary elections in seven months, during which time the constitution, which is currently suspended, will be amended and national reconciliation talks will take place.

“We expect the high level of political tension in Egypt to persist,” S&P said. Uncertainty over the Brotherhood’s involvement in the political process may call the legitimacy of upcoming elections “into question by a significant proportion of the electorate,” the company said.

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