The debts of Middle East countries shaken by the Arab spring are viewed as a less risky prospect than those of many European states, credit default swaps show.
The cost to insure against an Egyptian default is about 550 basis points less than Portugal, 300 basis points less than the Irish Republic and almost the same as Italy, according to Markit, the data provider. In Tunisia, the central bank’s swaps are trading at a third of the Irish Republic’s, at about 250 basis points, according to Markit.
As the Middle East grapples with changes of political regime, Europe’s high levels of debt and the lack of a clear resolution to the problems in the eurozone are widening the spreads, analysts say. In contrast, analysts are confident that the new governments in the Middle East are committed to the debt of their former regimes, even if they are not sure how they will pay it.
"The Arab spring hints at a happy ending whereas the incompatible incentives of the main European actors do not," says Gabriel Sterne, a London-based economist at Exotix, a boutique that specialises in illiquid debt. Therefore, the ordering of credit default swap spreads is "reasonable", Mr Sterne says.
Egypt, where Hosni Mubarak was toppled as leader in February, plans to fund its budget deficit through the selling of treasury bills, as well as through loan deals with Gulf Arab states. Although the interim government earlier declined an International Monetary Fund loan, that option is now back on the table.
In Tunisia, which this week held its first elections since the ousting of President Zein al-Abidine Ben Ali, officials are also seeking funds from international partners, such as the Group of 20 nations, as well as Arab states.
"There is a long history of countries that change their regime and still continue to honour the debts of the prior leadership," says Mark Watts, head of fixed income at National Bank of Abu Dhabi’s asset management division. The market has "judged that the willingness and ability to repay remained throughout".
Egypt is rated Ba3 by Moody’s Investors Service, while Portugal is rated higher at Ba2, the Irish Republic at Ba1 and Italy A2. Tunisia’s central bank is rated Baa3 by the rating agency.
Countries such as Tunisia and Morocco have "comparatively strong credit metrics" in terms of lower debt and fiscal deficit, according to Alia Moubayed, a London-based economist at Barclays Capital.
Both the Irish Republic and Portugal had debt to gross domestic product ratios in the order of 95 per cent last year. Barclays forecasts that the burden in both countries will rise to 108 per cent by the end of this year. In contrast, the metric is expected to rise to 79 per cent in Egypt and only 44 per cent in Tunisia, says Barclays.
Another important reason for current spreads is that the bonds in Arab countries are commonly held by local banks "which provide a strong anchor" for credit spreads, says Ms Moubayed. Or in other words, they are less prone to panic selling by international investors.
However, there is still some uncertainty over how Egypt, for example, will pay its debt. The $10bn promised to Cairo by international organisations and Arab states is "not enough to provide a long-term solution to Egypt’s fiscal problems, but sufficient to buy considerable room for manoeuvre", Simon Williams, a Dubai-based HSBC economist, wrote in a report this week.
