Egypt and Turkey: Middle East basket cases (Spengler)

The big story that is finally being told.


From David P. Goldman (Spengler):

The mainstream media has finally picked up the story I’ve been telling since February about Egypt’s impending economic collapse. The country is nearly out of money. Under the headline, “The Egyptian pound has a distressed future,” The Financial Times reported Nov. 16, just before the last days’ slaughter on Tahrir Square, “Investors are betting against the Egyptian pound, expressing their belief that it is soon to take a dive through the futures market while the spot market is held up by Egyptian government support. The pound’s twelve-month non-deliverable forwards (NDFs) weakened 2.8 per cent on Wednesday on fears that Egypt’s reserves, which are being used to support the currency, might be reaching critical levels. The spot market, in contrast, held steady – but for how long?”

Reuters reports this morning:

CAIRO Nov 22 (Reuters) – Egypt’s pound fell to its weakest against the dollar since January 2005 on Tuesday as mass protests against army rule prompted the cabinet to tender its resignation and threw polls into doubt, giving a fresh jolt to a shaky business climate.

The Central Bank of Egypt (CBE) has sought to defend the currency during the nine turbulent months since the overthrow of President Hosni Mubarak, but now traders said the pound could soon break through 6 to the dollar as investors run for cover.

They said demand for dollars among local companies and individuals had grown with the street clashes that have left 36 people dead since Saturday. Voting in the three-phase poll for the lower house of parliament is due to start on Nov. 28.

Egypt’s stock market is in free-fall, down 50% since the overthrow of Hosni Mubarak. What’s interesting is that Turkey’s stock market isn’t far behind.

The economic crisis overwhelming the Middle East stretches from Libya all the way through to Turkey. The problems are of a different order, to be sure. As I reported earlier, Egypt’s spendable foreign exchange reserves are down to just $13 billion and falling daily as the central bank buys its own unwanted currency from the market in order to postpone the inevitable collapse in the change rate. Why not just devalue? The probable answer is that the generals and their civilian front men are moving as much money as they can out of the country before Egypt goes bankrupt. Last month the generals fired all the private-sector board members of the central bank, as I reported at Asia Times Online. Everything that can be sold abroad for cash is being sold. Al-Ahramreported Nov. 19 that there is no enforcement of the ban on rice exports, because controls have simply broken down. Egypt subsidizes rice at a fraction of the world market price, so traders have an incentive to sell it overseas. Not only the country’s capacity to buy food in the future, but its existing stocks of food are disappearing. And Egypt imports half its caloric consumption.

No wonder the country is blowing up. An out-of-control kleptocracy is frantically trying to close on townhouses in Chelsea and apartments in the 16th arondissement before the central bank’s foreign exchange reserves run out. What will ensue, will be horrifying.

Turkey is in no danger of starvation, to be sure, but it faces a severe economic setback: Tayyip Erdogan, the country’s Islamist prime minister, spurred the country’s banks to lend huge amounts to consumers in advance of last June’s national elections. Bank lending rose at by 40% in 2010 and by another 40% in 2011, and Turks bought consumer goods from abroad, running up a balance of payments deficit exceeding 10% of GDP (the same level as Greece). Most of that is financed by short-term debt. Turkey won’t go bankrupt–it’s overall debt levels are manageable–but its economy will have to shrink by a good 5% to staunch the bleeding. That will deflate the neo-Ottoman balloon that Erdogan has been floating, and make it much harder to suppress Turkish grievances in the impoverished Eastern corner of the country.

There is no center of power, no reorientation, no neo-Ottoman empire, no Shi’ite crescent, no Arab Spring, no coherent description of what is occurring in the Middle East. There is only catastrophic social breakdown, civil unrest, despair and violence. If Iran gets nuclear weapons, they will be used. We cannot fix the Middle East. We can only protect ourselves from the fallout, starting with acquisition of WMD by a terrorist state. The last sentence of my book How Civilizations Die (and why Islam is Dying, Too) quotes Virgil’s warning to Dante in Canto III of the Inferno: Non ragionam da lor, ma guarda e pasa. Nothing to see here, folks. Keep moving.