Banks have been closed in Egypt for a week. They will start to re-open on Sunday and the fear is that capital flight will lead to a meltdown of the country’s financial system. Una Galini of Reuters Breakingviews reports:An exodus of foreign investors would probably be manageable. The central bank says its official reserves are $36 billion. Additional assets held with commercial banks – regarded as unofficial reserves – are estimated at around $20 billion. Before the crisis, foreigners held just 7 per cent of Egypt’s total public debt, equivalent to a little over $11 billion.
The bigger worry is if Egyptians also take fright. The rich could decide to shift their money into gold, dollars or overseas markets. The poor, many of whom are relatively new to banking, may choose to stash their life savings under mattresses instead.
Egypt’s banks could probably cope with a short-term run. Lenders are well funded with loan-to-deposit ratios of around 50 per cent. More than half the country’s 38 banks are owned by foreign groups, which are likely to back their subsidiaries. Public sector banks, which account for about half the market, benefit from full government support.
However, banks are the main buyers of government bonds. So sustained bank trouble would make it harder for the Egyptian government, already running a deficit, to borrow or refinance debt as it comes due. A declining currency, one possible consequence of turmoil, could fuel inflation.
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