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| Could the Middle East learn from the Greek crisis? |
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 The twists and turns in the Greek debt crisis have been avidly followed by investors for more than a year now. The latest chapter in the saga is a potential second bailout package, some harsh austerity measures, and a plan to get investors to "voluntarily" invest in more Greek debt rather than get their money back. .
We still don't know when the end of this crisis will come; will it be a default, Greek expulsion from the Eurozone or will the latest efforts actually work and Greek bond yields will start falling?
Europe's peripheral debt crisis has taught us that once a sovereign debt crisis kicks off it is very difficult to reverse. Even though the Middle East is in far better fiscal shape than parts of Europe there are plenty of lessons from the Greek crisis that the region should take note of.
For nations that currently have surpluses then the Greek crisis offers a lesson in investing. Sovereign debt has been central to the global financial system for decades. It was often considered risk free, or before 2009 relatively risk free as in the case of Greece. However, now sovereigns themselves are becoming credit risks. Greece is now under pressure, but how long before the bond vigilantes turn their attentions to other countries with excessive debt loads like Italy, the UK and maybe even the US?
The demise of the risk-free asset will make it harder for countries like oil producers who need to find a way to earn returns on their cash surpluses. Volatility in sovereign markets is likely to rub off onto other risky asset classes such as stocks. So investors won't be able to rely on these asset classes as reliable places to put their money as they have done in the past.
Going forward, the job of the investor will be tougher than it has been as it will require a more diligent approach to search out corporates and sovereigns with strong finances as investors treat high and excessive debt levels with increasing suspicion.
For those nations that already have deficits they need to be careful to ensure that their plans for growth are fiscally sustainable. This is a great challenge for a country like Egypt. The Arab Spring that caused the downfall of Mubarak was fuelled by rising prices and high youth unemployment. The people toppled the government in a bid to increase their living standards and opportunities. But this will require a massive amount of social spending at the same time as investors are getting more fussy about who they lend to.
Egypt's budget deficit is predicted to top 10% of GDP this year. Inflation is a huge 11.9% and GDP collapsed in the first quarter, when the economy contracted by 3.77%. Growth must bounce back this year so that investors have the confidence to lend to Egypt allowing it to build much-needed infrastructure, provide training and get its young people out to work over the next few years.
Egypt doesn't have the bandwidth to invest money unwisely or squander it on projects that don't yield results otherwise funding may dry up, causing even more social problems.
The investment community is on high alert for countries that allow their public finances to spiral out of control. We are no longer in an environment where high debt levels and sluggish growth rates will be tolerated, so fiscal discipline has to be at the heart of Egypt's transformation.
The Greek crisis has consequences for both surplus and debtor nations. The investing landscape has changed and countries in the Middle East need to adapt.
(Source: Ameinfo)
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| Last Updated on 04 July 2011 15:36 |