Tag Archives: North Africa

Our Daily Warning

As the government of Romania falls as another victim of the economic crisis, the global political risk factor continue to rise and the odds of even more social unrest gains a few more percentage points. EconoTwist’s and many bloggers , analysts and researchers,  have been warning about this for years. But perhaps it’s time for another warning?

 “With people already questioning a model of society prone to generate inequalities, civil unrest in one country would rapidly spark political turmoil and social dissatisfaction across Europe. Foreign investors would fly away from Euro-denominated assets, scared by a spiral of riots, selective defaults, and low GDP that would eventually lead the Euro to collapse.”

Edoardo Campanella

Romanian Prime Minister Emil Boc on Monday announced his resignation after three weeks of anti-government protests in the country, following in the footsteps of Giorgio Papandreou and Silvio Berlusconi.

He said he took this decision in order to calm “social tensions” and so the “economic stability of the country” is not affected.

Well, the resigning of the PM’s in Greece and Italy doesn’t seem to have helped much in that matter.

See: World Erupts in Anger: “You Can’t Eat Money!” (Photo Coverage)

It seems more like political leaders fleeing from their responsibility.

And if someone don’t claim that responsibility soon, and start doing something about it, we may very well find ourselves in a helluva lot more trouble than we’re already in.

ReadEurope: “Time to Get Angry”

In case there is still anyone who not quite grasp the depth of this crisis, here’s the adviser for the Italian senate, Edoardo Campanella, to explain:

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The Social Consequences of the Euro Crisis

About a year ago the Arab spring taught the world an important, predictable lesson. When young people cease to be the engine of the economy and are excluded from the decision-making process, long-run economic growth is endangered and political stability undermined.

This lesson holds true for dictatorial regimes as well as for long-established democracies.

In Europe, a deteriorating youth marginalization is creating the preconditions for a social earthquake capable of shaking the old continent and impairing the survival of the Euro.

Until now, safety nets and intra-family transfers have prevented peaceful Indignados-style protests from turning into violent Arab-ones.

However, the shortfall of resources due to a new imminent recession, along with fiscal austerity measures, will impair this channel, whereas frustration and social resentment will keep growing

The figures are already alarming.

According to a report recently released by the European Commission, one in five young people is at risk of falling into poverty or social exclusion, only one third of young people are employed, and one in three has been out of work for over one year.

Moreover, 40 per cent of the unemployed are under 30, to the amount of 9 million people. On the other extreme of the age scale, the trend is reversed.

The employment rate for people aged 60-64 increased from 23% in 2000 to 34% in 2010.

In peripheral countries the situation is extremely acute.

The Portuguese government urged its young unemployed to leave Europe for better opportunities elsewhere, in Italy almost 120.000 young talents left the country last year, and in Spain thousands of people are pouring into former colonies in South America.

Across Europe, and even in Germany or Sweden, young workers are experiencing in-work poverty due to what economists call labor market dualism.

Unlike their older colleagues, they just have access to temporary contracts, which pays on average 14%  less than permanent contracts and are more vulnerable to sudden layoffs.

The medium-term economic and social consequences of such youth marginalization are huge.

  • First, an economy that is not nourished by fresh ideas loses competitiveness, becomes vulnerable to interest groups, suffocates material as well as intellectual progress, and is fated to stagnation or even prolonged recessions.
  • Second, high income volatility and job insecurity discourage the creation of new family units that are essential to generate social cohesion as well as inter-generational solidarity.
  • Finally, economic uncertainty tends to lower fertility rates with negative spillovers on the size of tomorrow’s workforce, population ageing, and the sustainability of public finances. The political implications could even be more disastrous.

Therefore, what begs asking is whether these economic factors could contribute to the eruption of an Arab spring in Europe.

There are, of course, huge economic and political differences between North Africa and Europe. The latter, unlike the former, is graying, prosperous, and democratic. But, paradoxically, the combination of these diverging demographic trends and opposite institutional features, along with the same aspiration for a better future, could lead to an identical result.

In North Africa young people represented the demographic majority of a despotic regimes, in Europe the political minority of a democratic system.

The former fought for an economic progress they just started to savor but that was hampered by the elite in power. The latter would fight for a material wellbeing that is only benefiting their older fellow citizens at their expenses.

Either way, young people can improve their situation and gain power only through violent rather than legal channels.

What event, if any, will inflame the upheaval in Europe, which country will be the epicenter of this social earthquake, and what impact it could have on the institutional, democratic order remain uncertain.

However, it is still possible to predict part of the effects.

With people already questioning a model of society prone to generate inequalities, civil unrest in one country would rapidly spark political turmoil and social dissatisfaction across Europe. Foreign investors would fly away from Euro-denominated assets, scared by a spiral of riots, selective defaults, and low GDP that would eventually lead the Euro to collapse.

Edoardo Campanella

To avoid this catastrophe, European governments should start promoting the role of the youth in their societies through family friendly policies, career paths related to productivity rather than to seniority, cross-country mobility, and the eradication of dual labor markets.

Spring is approaching. European leaders should act soon.

Edoardo Campanella is economic adviser to the Italian Senate.

This article is syndicated by www.eurointelligence.com.

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The Gaddafi Effect

The drama in Libya, accompanied by the rising oil prices, was naturally the center of investors attention Tuesday.  Libya is the world’s 12th largest producer of oil, and the third largest supplier to Europe, and a potential supply disruption would have a material effect on prices.

“As ex-colonial master Italy has stronger links than most, and the current Italian government has courted a two-way investment relationship with the Gaddafi regime.”

Gavan Nolan


The Markit iTraxx Europe widened to beyond 100 basis points Tuesday morning, hitting this level for the first time in nearly a month, though a slight decline in the oil price to $106 a barrel helped it recover mid-afternoon. Banks and sovereigns were relatively stable today, and it remains to be seen whether the upcoming Irish general election will be overshadowed by events further afield, Markit Financial Information report.

Risk aversion permeated the markets today as investors grappled with the implications of turmoil in the Middle East and North Africa.

After the revolutions in neighbouring Tunisia and Egypt, it now seems that Libya is the next most likely country to see a forced change in government.

The protests have been met with a violent response by the Gaddafi regime, prompting widespread condemnation from world leaders. Senior figures from the government, including the justice minister and ambassadors to the US and UN, have abandoned Gaddafi, according to reports.

“The unrest had a predictable effect on other MENA sovereign spreads, i.e. widening. Libya itself doesn’t trade in the CDS market (no debt outstanding) but Morocco, a more liberal North African country, does. Its spreads widened beyond 200bp today, approaching the levels it reached at the peak of the “Jasmine Revolution” in Tunisia late last month,” credit analyst Gavan Nolan at Markit writes in his daily summary. Adding: “In contrast to the highly autocratic Libya, Morocco does have some level of democracy and is a constitutional monarchy. But protests have still broken out in recent days, with groups as diverse as trade unionists and Islamic fundamentalists calling for less corruption and more press freedom – a reminder that democracy is more than elections.”

Western investors the primary concern was the rising price of oil. Brent crude – now considered a better gauge of global demand due to supply issues for WTI – hit $108 a barrel last night.

Libya is the world’s 12th largest producer of oil, and the third largest supplier to Europe, and a potential supply disruption would have a material effect on prices. Like most Arab countries, the national, state-owned oil firm is the major producer. But there are several western-firms that have operations in Libya, including joint ventures with the government.

“As ex-colonial master Italy has stronger links than most, and the current Italian government has courted a two-way investment relationship with the Gaddafi regime. Eni, the largest Italian oil company, has extensive production facilities in the country, as does Spanish firm Repsol. Both firm’s have seen spread widening this week, though the movements are relatively modest so far,” Nolan points out.

The energy and utilities sectors led the broader market wider, though again the movements weren’t dramatic.

The Markit iTraxx Europe widened to beyond 100 bp’s earlier this morning, the first time it has hit this level in nearly a month, though a slight decline in the oil price to $106 a barrel helped it recover mid-afternoon.

“Banks and sovereigns were relatively stable today, and it remains to be seen whether the upcoming Irish general election will be overshadowed by events further afield,” Gavan Nolan at Markit Credit Research concludes.

See also: Markit. Chart of the Day

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Please, Don’t Mention “Contagion”!

Mention the word “contagion” to people in the credit markets and most of them will immediately think of the euro zone debt crisis, Greece, Ireland, and start swapping CDS’ like crazy!  This, of course, would be perfectly natural given that the fate of peripheral sovereigns is the ones that’s shapes spread direction these days. But that cognitive association may be about to change, according to Markit Credit Research.

“Investors sit up and take notice of events in North Africa. Over the last two weeks we have seen the “Jasmine Revolution” unfold in Tunisia, leading to the overthrow of a dictatorship and ongoing unrest. Investors have been asking is this contained or is it contagious? If it’s the latter then who’s next?”

Gavan Nolan


“The last few days have shown that the contagion scenario is more likely than it seemed last week and a frontrunner has emerged for the next country in line. Egypt has seen its fourth consecutive day of protests today, with anti-government demonstrators taking their cue from their Tunisian neighbors and demanding that President Mubarak, Egypt’s autocratic president, step down. The authorities have responded by cutting internet access and using force to break up the protests,” analyst Gavan Nolan writes in his weekly summary.

Credit investors have taken note, and the sovereign’s spreads have widened 17 bp’s Friday, to 405 bp’s ,and nearly 100 over the last week.

Egypt has always been one the riskier names in the region due to its considerable debt burden, high inflation and current account deficit; its spreads hit 800bp in October 2008 post-Lehman crisis.

It is also one of the more liquid credits, having a Markit Liquidity Score of 1 (the highest available). Morocco, a less liquid name (Markit Liquidity Score of 3), has also widened this week.

But now the markets are looking for answers for the “who’s next?” question beyond North Africa. Spreads have widened in Lebanon, Jordan and rich Gulf states such as Saudi Arabia, Qatar and Bahrain.  Even Israel – a liquid name – has seen its cost of protection rise sharply today. One might ask why spreads should widen in a country that is the only democracy in the region. But Egypt is Israel’s closest Arab partner, and the fall of Mubarak could leave it isolated if the dictator is succeeded by a less-friendly regime. Investors are starting to price in this risk,” Nolan points out.

In fact, one could take the view that the markets have been under-pricing political risk in emerging markets.

Investors have been focused, rightly, on the improving economic fundamentals of many countries in the less developed world. But politics matters, particularly in sovereigns with unstable, undemocratic systems.

“We remarked last week that the Markit iTraxx SovX CEEMEA was back above the Markit iTraxx SovX Western Europe index, a trend that has continued this week. This is a result of peripheral euro zone sovereigns rallying more than anything else. But the CEEMEA has widened in recent days as investors use the index to reflect their uncertainty on emerging markets. This is despite there being only three Middle Eastern names among the underlying constituents (Turkey, Qatar, Abu Dhabi). The chart above shows that the skew has widened on the CEEMEA, indicative of the widening in the index compared to the relative stability of the constituents. It is likely that the markets will start to differentiate between the countries in focus and price accordingly.”

But much will depend on how the Egypt story develops and whether the contagion effect swamps attempts at more discerning analysis.

Politicians will also have a role to play in determining spread direction in the developed world.

“Most of the key policy makers are in Davos, and it seems the informal talks of the forum have pushed opinion towards a more radical response to the sovereign debt crisis. The option of using the EFSF to buyback Greek government bonds is now “on the table”, according to EU officials. The credit markets have been nonplussed by the news thus far; they want concrete measures (unlikely before EU council meeting on March 24).” Nolan writes.

Aside from sovereigns, investors will be keeping an eye on developments in the banking sector. Spain has announced plans to boost the capital of its cajas, and the markets reacted positively to news of a restructuring at La Caixa, the biggest caja.

There was some confusion in the market over whether it would result in a succession event, though the consensus so far is that it isn’t.

“Earnings will continued to be closely watch, with bullish investors hoping that the broadly positive trend extends into next week,” credit analyst Gavan Nolan concludes.

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