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Monthly Archives: October 2011

The emperor has no clothes, and the empire has no tailors. From the English-language edition of Almasry Alroum:

Egypt might face bankruptcy within six months, Egyptian reform advocate and presidential hopeful Mohamed ElBaradei warned on Monday.

During a meeting with labor leaders at the Center for Trade Unions and Workers Services (CTUWS) in Helwan, south of Cairo, ElBaradei attacked the “failing” policies of Egypt’s ruling military council.

He criticized the Supreme Council of the Armed Forces (SCAF) for what he called incompetence and lack of experience, saying that experienced government officials don’t have enough power.

Egypt is currently relying on its cash reserve with no gross domestic product, he said.

In September, the Central Bank of Egypt (CBE) said foreign reserves dropped US$697 million in August, a continuation of an eight-month downturn, standing at US$25.008 billion at the end of August.

Observers blame the drop in cash reserve on the intensive exit of foreign capital during the January revolution. Experts also blame the halt in Egypt’s sources of foreign currency, such as tourism and exports.

As I’ve been warning all year on this blog and elsewhere, “national bankruptcy” for Egypt is not the same thing as the bankruptcy now under negotiation for its neighbors on the northern coast of the Mediterranean. The largest Arab country imports half its caloric consumption and at least 15 million Egyptians depend on government rations for daily survival. Half of Egyptians. Roughly half of Egyptians live on less than $2 a day, but a small (pita-sized) loaf of subsidized bread sells for less than 1 cent US. There are spot shortages, but Egyptians are not starving–yet. If the country runs out of money, it also runs out of food.

Egypt’s financing requirement annually is somewhere between $15 and $20 billion a year; the Gulf States and the IMF might be good for a third of that. Of course, Egypt could postpone actual starvation, for example, by cutting its military budget massively and diverting funds to food. I suspect that something like that may be happening already.

When he headed the International Atomic Energy Agency, ElBaradei apologized for Iran’s nuclear ambitions, and the Bush administration tried to blackball him. He is no friend of the West. But he’s the only politician in the Egyptian presidential race who has spent his career away from the inbred, paranoid fantasy world of internal Egyptian politics. As a political outsider with no natural constituency, he was for a while a favorite of the liberal punditeska, popping up in Tom Friedman columns at the start of the Egyptian rebellion. He has very little chance of election. As an outsider, he might as well state the obvious.

So much for the Arab Spring.

UPDATE, October 5, from the Financial Times:

The last report we had put reserves at $25 billion. Now they are down to $19.4 billion.

Egypt has lost a third of its foreign currency reserves since the beginning of the year as a result of the turmoil accompanying the revolution, which swept Hosni Mubarak, former president. out of power.


Foreign currency reserves fell from $29.8bn in February to $19.4 at the end of September, according to figures published by the Central Bank of Egypt. The current reserves are estimated to cover 4.8 months of imports, down from 6.9 in April 2011.


Reserves declined by $1bn in September, probably the result of foreign investors dumping Egyptian debt because of worries over the widening deficit and the country’s faltering political transition, according to Beltone Financial, the Cairo-based investment bank. “It is very likely that foreigners could have decreased their holdings further in September 2011, on worries over the Egyptian government’s ability to finance its deficit and on latest disagreements between the military council and political parties,” said the bank in a report on Wednesday.

There’s something wrong with that last sentence: The central bank reported $25 billion of reserves in August, so the decline is closer to $6 billion.  Perhaps this has something to do with it: “Only $500m of some $7bn of promised aid from Saudi Arabia and the United Arab Emirates have arrived so far,” the FT writes. I suspected that Egypt counted loans as reserves. Perhaps these have now been un-counted. That is particularly worrying, because the Gulf States are likeliest source of emergency aid for Egypt. The country’s financing requirement appears to be somewhere between $10 and $20 billion a year, closer to the upper end of the range.

It astonishes me that this impending disaster has gotten to little coverage in a global media that hailed the Arab Spring as the best thing since the fall of Communism.

A Beautiful Mess

October 3rd, 2011 - 6:31 pm

John Nash, the “Beautiful Mind” in the film based on Sylvia Nasar’s biography, was a far less pleasant fellow than the character played by Russell Crowe, and the “Nash Equilibrium” a far less pleasant vision of the world than the book or film allowed. Nash demonstrated that it is quite possible for competitors to choose mutual annihilation as a matter of rational self-interest. Let’s say you belong to a neolithic tribe that hunts mammoths. If the tribe next door kills more mammoths than you do, they eat more, get stronger, and kill you (and possibly eat you, too). So you kill as many mammoths as possible, both to eat more and deny sustenance to the competition. So does everyone else. Mammoths become extinct, and you all die out. A simple way to put it is that people only accept a solution as long as it includes them.

Europe is locked in something of a  Nash Equilibrium: the political class will commit collective suicide and take what remains of the European economy down with it, rather than accede to terms that would save the economy, but eliminate the political class. The political class draws on a vast number of actual and prospective wards of the state who stand to live miserably if governments really were to cut spending enough to allay the fiscal crisis.

From the standpoint of many Italian voters, it makes no sense to accept budget cuts, because the proportion of elderly dependents will rise from 30% of the population today, to an impossible 65% around 2050. Italy’s present generation, which had about 1.25 children per female, will age into a world in which the tax base cannot possibly support them for the simple reason that too few taxpayers will exist. Fiscal austerity is not a question of comfort but of survival, and Italians have no rational reason to accept the sort of terms that the European Central Bank would like, because under austerity, their lives would change beyond recognition. This is an existential crisis, as the consequences of Italy’s gradual demographic death peak over the horizon.

Italians want to postpone the reckoning by extracting more subsidies from Germany, but German voters vehemently oppose this, and expressed their anger at their government by crushing the ruling party in six state elections in succession. By 2040, Germany’s old-age dependency ratio will rise to 58%, almost as bad as Italy’s. Because Germany has succeeded in dominating key niches in the world market for capital goods, Germany has more flexibility. But Germany’s problem is almost as severe as Italy’s, and Germans do not believe they should subsidize their feckless southern neighbors.

On the face of it, the stock market’s fixation with southern Europe seems unwarranted; as I argued in this morning’s Spengler column at Asia Times Online, national bankruptcy is the best thing that could happen to Italian manufacturing. FIAT, to be sure, probably will go bankrupt (and deserves to for the offense of pitching the poor  man’s car of the Italian 1960s, the Cinquecento, to downwardly-mobile American consumers). The real Italian economy exists off the books, in pockets of technical talent preserved in thousands of family-owned firms. Without the predatory incompetence of the Italian state, these talented companies could find Asian partners and extend their reach to the world market.

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