CAIRO: Uncertainty over the fate of Greece and other troubled EU economies has caused fluctuations in global markets this week despite the announcement of a nearly $1 trillion rescue package by European officials and the IMF.
Egypt’s main index dipped 2.2 percent on Tuesday alone, tracking world markets declining on European woes, Reuters reported.
Across the Atlantic, the Dow Jones Industrial Average fell by 139.89 points on May 7 due to fears over the weakness of the Eurozone. When Egypt’s market opened on May 9, the benchmark EGX index dropped by 5.1 percent, the largest since November.
Then on Monday, markets in Europe rose at their fastest rate in the past 17 months and the S&P 500 recorded its biggest percentage and point gain at the open of the day since the 1960s, Reuters reported.
The rally was due to the EU, national Eurozone governments’ and the IMF’s announcement that they would join forces to save the Euro and the Eurozone economies. The three came together to ensure that nearly a $1 trillion would be placed into a new fund to keep these economies afloat by paying off their debt.
The following day, however, the Euro fell early in the morning, with losses near 0.8 percent at $1.2675, as investors’ euphoria quickly dissipated over fears regarding the EU’s persistent, long-term economic structural problems and doubt as to whether the proposed rescue plan would meet its objectives.
The trouble in Europe began when financial authorities discovered that the Greek government had been running deficits close to 14 percent of GDP — well beyond the 3 percent threshold that the Eurozone allows for its members — said Magdy Sobhy, senior economist at Al-Ahram Center for Political and Strategic Studies.
The Greek government became increasingly unable to pay the interest on its debt, he added. It then issued bonds within the market place to finance its debt, but in the last four to five months, investors wary of a default by the Greek government began asking for more interest on the bonds to cover their risk.
“Investors began asking for as high as 11 percent interest rates on Greek bonds, which is quite high when one considers that the interest on German bonds was about 3 percent,” Sobhy said.
Finding itself in a difficult position, Greece called on its Eurozone counterparts to come to its aid. Germany, considered the economic engine of Europe and a Eurozone member, was reticent to bail Greece out of its own financial mess, believing that it should not bear the brunt of another countries own financial disregard.
“Germany’s hesitation only further complicated matters for Greece and by extension the Euro and the Eurozone members,” opined Sobhy.
In the end, Eurozone members and the IMF decided to come to Greece’s rescue by providing €110 billion rescue package to help it repay its outstanding debt.
However, the shaky Irish, Portuguese and Spanish economies “only complicates matters even more for the Eurozone,” he continued.
If these economies end up with a fate similar to Greece’s, the Euro would be in dire straits.
Concretely to save the Euro, the European Commission has pledged €60 billion, Eurozone members will put forth €440 billion and the IMF contributing €250 billion to a European fund, which will distribute the funds over a three-year period in segments, according to the Associated Press.
Thanks to this audacious measure taken by the Europeans and the IMF, Sobhy feels that the “Greek bailout and the newly announced fund to save the Euro should suffice to stem a further economic downturn.”
Earlier this week, Teymour El-Dirini, head of Middle East and North African sales at Naeem Brokerage, reiterated Sobhy’s sentiments that the measures taken by the EU would help the European economy get back on track. “This announcement will help considerably, and any news of proactive action by EU policy makers will ensure that the Euro remains strong,” he said.
But as markets reacted to the news, and the Euro dipped, El-Dirini told Reuters, "We see weakness in the region, because the euro is down now.”
Sobhy predicted that the Eurozone “will continue to suffer, showing weak growth of about less than 1 percent this year versus the 3 percent that the US will post, according to estimates.”
Unfortunately the bad economic news in Europe may translate into direct losses for the Egyptian economy.
Given that Egypt is the EU’s first market for exports, Sobhy predicts that certain industries will feel a squeeze in revenue, such as iron, steel, textiles and chemicals; he also mentioned that tourism would be adversely affected as well.
Nonetheless, El-Dirini pointed out, “despite the negative news coming out of Europe, the Egyptian Pound is strong, stocks are doing well, markets are in tact and growth is healthy.”
