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WHEN THE U.S. SNEEZES, THE WORLD CATCHES A COLD…
First it was Fannie Mae (short for Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), the companies that guarantee or own roughly half of all the $12 trillion mortgage market, that needed to be bailed out. The Federal Reserve saved them from collapse, while taking firmer control of management. Then, the fourth largest US investment bank, Lehman Brothers, filed for bankruptcy protection. Next, stocks on Wall Street and other world exchanges dropped as Merrill Lynch was bought by Bank of America in a $50 billion deal, following concerns that Merrill had been hit hard by mortgage debt. Then AIG, the world’s largest insurance company, sought – and received – from the Federal Reserve an $85 billion loan package to rescue it from bankruptcy in return for an 80-percent public stake in the firm.
That’s a major economic upheaval in a matter of days, and these financial institutions are probably not the only ones that will be hit. Pundits are arguing whether or not central bank intervention in these situations is wise, since government underwriting of private debt, while allowing the market to recover short-term, is not a long-term fix. But the alternative, i.e. letting the market purge itself, would plunge the US into a recession some say would be worse than that of the 1930s. Obviously no one, especially in an election year, wants that. But it seems likely that post-election America, like many other countries, will be up for some stringent economic reforms.
For now, no one is sure where the credit crunch is heading. A belief in the resiliency of the American economy may win the day, but in the meantime, Egypt should brace for repercussions, and learn a lesson or two. We’ll be fortunate to receive the expected levels of FDI, as international players may have less appetite to venture overseas. The same applies to privatization; everyone will want to hold on to what they’ve got. America’s credit crunch is already affecting the Egyptian stock market, as foreign stockholders are substantially reducing their positions. Moreover, the tourism sector may feel the crunch as vacationers choose to stick closer to home.
According to George Cooper, a JP Morgan strategist, one of the main reasons for the crises is a simple truth, that under the current system consumers are encouraged to consume, even if it means borrowing at high interest rates to do it. People should instead be encouraged to save, since a lack of savings makes central banks, just like people, more vulnerable to unforeseen disasters. Right now, as US treasury secretary Henry Paulson put it, the US is trying to “work off some of the past excesses.”
Some call these excesses “bandit capitalism,” borrowing and spending off the scale, coupled with all kinds of “innovative” practices that amount essentially to malpractice. According to commentator Arnaud de Borchgrave, “high volatile interest rates, reckless lending practices, lax oversight and rapid deregulation paved the way for the greatest banking disaster since the Great Depression.”
Public outrage in America is growing, especially considering the pay inequities now highlighted in the news. Sixty years ago, CEOs earned 10-30 times more than average employees, whereas today a Fortune 500 CEO’s annual average compensation ($11.5 million) is 364 times more than that of average workers.
With Egypt in a phase of intensive growth, it’s important to take the hint: we can’t afford to finance projects with excessive credit. We need to stick to the basics and apply the rules based on healthy leverage ratios and proper debt service coverage. At the same time, we need to pursue our overall reform package that facilitates business and sound investment, while being mindful of the painfully obvious gap between Egypt’s haves and have-nots. In other words, we have to keep moving forward, but with greater caution and conscience.
OMAR A. MOHANNA
President, AmCham Egypt
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