Egyptian Demonstrations Shake Markets

Where the demonstrations in Tunisia sent some shivers into the markets earlier, the rioting in Egypt is causing much more serious tremors now. A country with 80 million people, Egypt’s population is mostly young – the median age is 24. And the overall unemployment rate of about 9.7% is surely much, much higher among citizens under 30 years old.

Egypt’s young, restless and unemployed are at the center of the demonstrations that have caused the EURUSD and USDJPY trades to move toward the generally safer US dollar. Other safe havens include gold, of course, which has gained back some of its recent losses, and oil, which rose sharply on the perceived threat to the trade in crude.

The official exposure of foreign banks to Egyptian debt, as of last September, amounts to $44 billion, according to The Wall Street Journal citing figures from the Bank for International Settlements. The five-year credit default swaps (CDS) spread has risen more than 3% in the past week.

And like the fear of contagion that spread following Greece’s financial problems earlier last year, CDS spreads are widening throughout the region. Many of the countries in the Middle East and North Africa have young populations facing high unemployment rates. Mixed with rising prices for food, it could turn out to be an explosive brew.

If the protests spread further from Tunisia and Egypt, to Yemen or Lebanon or even to Saudi Arabia, investors could move more strongly into US dollars, oil, and gold. The euro could take most of the beating, as the yen appears to have survived the recent downgrade of Japan’s credit rating.