Egypt's Downgrade Is a Win for Credit Agencies and Investors

By Douglas A. McIntyre

Moody's acted quickly to downgrade the debt of Egypt, making this one of the few times a credit rating agency acted quickly to change an opinion on sovereign debt. Over the past few years, Moody's, Fitch, and S&P have been accused of being slow in announcing opinions on weak European nations and Japan.

The rating agency commented on Egypt as it downgraded the Middle Eastern nation's sovereign paper from Ba2 to Ba1 and changed its outlook from stable to negative:

Moody's decision to downgrade Egypt's government bond ratings is driven by increased event risk. This has resulted from escalating political tensions in the country following the recent uprising in Tunisia, with large-scale anti-government protests taking place.

Moody's notes that Egypt suffers from deep-seated political and socio-economic challenges. These include a chronic high rate of unemployment, elevated inflation and widespread poverty. These, together with a desire for political change, have fueled popular frustrations.



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Political turmoil could cause Moody's to seriously examine Egypt's financials again.

"Bond vigilantes" will hit Egypt's paper hard this week and raise interest rates to unsustainable levels. Intrepid capital markets investors will probably buy Egypt's sovereign bonds at a discount on the assumption that the country's problems will be solved by a military crackdown or a regime change.

The situation in Egypt is not like those of Greece or Ireland, but the outcome for investors could be similar. Greece's problem was a balance sheet issue. Egypt's is one of political stability. Either way, large international investors make similar calculations. Interest rates on Egypt's debt may swing wildly, which gives money managers plenty of volatility to make profits.

Money does not care about distress no matter who the victims or winners may be. Business is business, not personal, even if "personal" is the fate of an entire country.

This article available online at:

http://www.theatlantic.com/business/archive/2011/01/egypts-downgrade-is-a-win-for-credit-agencies-and-investors/70522/