Are We Facing A Political Crisis, Too?

Over the weekend things haven’t got any better, either in Cairo or in Brussels. Egyptians are now lining up outside banks to get their money out, as the value of the currency has dropped to a 2005 low over the last week. In Brussels has the members of the EU parliament just learned that Angela Merkel and Nicolas Sarkozy have made some kind of a pact on how to restore the Union’s faulty economy; a six-point plan that includes abolition of the salary indexation systems, greater harmonization corporate tax rates and an overhaul of national pension systems. It will be interesting to see how the financial markets react.

“Many of the countries in North Africa and the Middle East share Egypt’s worst features: an autocratic government; high unemployment; and rising food prices. Disaffected populations arise from such circumstances, and the more discerning investors are trying to pick out sovereigns that are most vulnerable to political instability.”

Gavan Nolan

Other elements included the insertion of a “debt alert mechanism” into national constitutions, the mutual recognition of educational diplomas and the establishment of national crisis management regimes for banks.

Over lunch at the EU leaders’ meeting this weekend, German Chancellor Angela Merkel and French President Nicolas Sarkozy made an attempt to convince their euro zone homies of the pact’s merits.

Details would then be thrashed out at a specially convened summit of euro zone leaders in March, together with an already-scheduled EU summit later in the month.

“We need to increase competitiveness and the yardstick should be the member state that is leading the way,” Ms. Merkel told journalists immediately prior to the lunch.

Suggestions that Germany should increase salaries, potentially harming the country’s competitiveness, have irked Berlin in the past. The German leader indicated that non-euro zone states will also be invited to sign up to the competitiveness pact if they wish.

Mr. Sarkozy hailed the initiative as a major step forward. “France and Germany are working hand in glove to defend the euro,” he said at the joint briefing.

The Franco-German “structural plan” is a way of boosting European competitiveness and ensuring the convergence of member state economies, he added.

The six-point plan, as seen by the, that aims for more joint governance of the 17-nation euro zone economy appears to have hit the fan like piece of …. almost immediately.

Belgian Prime Minister Yves Leterme blasting the plan as being “overly constrictive.”

“There must be more economic cooperation, but member states must be left the room to carry out their own policies,” Mr. Leterme said on arriving at the one-day summit, Friday afternoon.

“Each member state has its own accents, its own traditions. We will not allow our social model to be undone,” he says.

Critics also points at the pact’s intergovernmental nature, that unwinds the role of the EU’s institutions envisaged.

“We welcome the move towards greater economic governance as step in the right direction. However, the method being proposed will not provide the required result as it is purely intergovernmental,” leader of the European Parliament’s Liberal group, Guy Verhofstadt, says. “The only effective way of ensuring the discipline and objectiveness that is required, is through the Community method and with the empowerment of the Commission to act and set real sanctions.”

Sovereign spreads have rallied sharply in recent weeks on an expectation that the EU will take more radical steps in addressing the sovereign debt crisis.

“Investors are aware that concrete measures probably won’t be announced today; the EU has already said that this will come from the next meeting in late March. But they will be looking for clarification on what options are on the table,” credit analyst Gavan Nolan at Markit writes in his weekly Credit Wrap.

There seems to be consensus on increasing the lending capacity of the EFSF. But in spite on the new pact, France and Germany seems to be quite a long way from agreeing on extending the scope of the facility. According to reports, would France like to use the EFSF to finance debt buybacks of peripheral government debt and also buy government bonds on the primary and secondary markets. Germany opposes the latter measure on legal grounds but could be open to the debt buyback idea, i.e., replacing the ECB’s SMP.

Extending the maturity of current bailout loans and lowering the interest rate are also thought to be possibilities.

However, the anti-government protests in Egypt are likely to dominate the news headlines this week, too.

Egypt’s sovereign CDS spreads widened sharply last week and during the early part of this week as the markets reacted to the uncertainty of political upheaval. There was some recovery on Wednesday amid hopes that there would be a peaceful transition from the current autocracy. But the protests against the government have been building and the violence has intensified, leading to further spread volatility.

Some news reports indicates that the US is placing to put pressure on Mubarak to resign immediately, with a military-backed caretaker government installed as an interim measure.

Gavan Nolan comments:

“Since the onset of the “Jasmine” revolution in Tunisia earlier this year the markets have been busily repricing political risk in the region. Many of the countries in North Africa and the Middle East share Egypt’s worst features: an autocratic government; high unemployment; and rising food prices. Disaffected populations arise from such circumstances, and the more discerning investors are trying to pick out sovereigns that are most vulnerable to political instability.”

“Bahrain has seen its spreads widen significantly this week. The Gulf state has a Shia Muslim majority but is run by a Sunni elite. Its economy is relatively small and is highly dependent on its larger neighbor Saudi Arabia,” he adds.

Whatever happens in Egypt, the risk of contagion across the region is likely to be a major factor over the coming weeks.

Egyptian Vice President Omar Suleiman held the first formal meeting with members of the opposition, Sunday, in a move toward establishing a transitional government, even as some opponents continued to urge President Hosni Mubarak’s immediate resignation.

According to, Suleiman, who met with the Wafd and Tagammu parties, as well as with the Muslim Brotherhood and billionaire Naguib Sawiris, agreed to study constitutional changes, according to a cabinet statement after the gathering.

The Muslim Brotherhood, the largest opposition faction, said it still wants Mubarak to resign immediately and that it supports the continuation of the protests in Tahrir Square.

“Perhaps of more importance for the CDS spread direction is the outcome of today’s EU summit,” Gavan Nolan wrote Friday afternoon.

After the new French-German pact have been put on the table, that may very well become a fact.

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4 responses to “Are We Facing A Political Crisis, Too?

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