The cost of insuring Egyptian debt fell dramatically yesterday in a sign that financial markets are growing less concerned about the implications of the political crisis.
The price on five-year Egyptian credit default swaps (CDS) fell 100 basis points. The swaps generally get more expensive when traders perceive more risk.
Insuring US$10 million (Dh36.7m) of Egyptian debt now costs $350,000, down from a high earlier in the week of $450,000.
Despite the declining swap rates, Moody's yesterday downgraded the ratings for five Egyptian banks, citing unrest in the country. The five banks were the National Bank of Egypt, Banque Misr, Banque du Caire, Commercial International Bank and Bank of Alexandria.
Hosni Mubarak, the president, said on Tuesday he would step down later this year, which was seen by traders as relieving some of the tension of recent days.
Some traders who had taken short positions in Egyptian CDS in recent weeks began to unwind them yesterday, which contributed to the fall in values.
But despite the drop in the cost of insurance, analysts predict plenty of challenges ahead.
Standard & Poor's yesterday became the third international ratings agency to downgrade Egypt's sovereign debt. S&P lowered the rating on Egyptian debt to "BB" from "BB-plus" and warned it could be cut further in the next three months.
Moody's Investors Service and Fitch Ratings also downgraded the debt in the past week as the civil strife peaked.
"If the political situation doesn't show signs of resolving, and certainly if the banks remain closed, then that's going to start to get more serious," said Richard Fox, the head of Middle East and Africa sovereign ratings at Fitch .
He said receiving information from the country remained difficult.
S&P noted that Jordan and Algeria were at the greatest risk of experiencing similar unrest.
"What we're seeing is to some effect contagion," said Kai Stukenbrock, the sovereign analyst for S&P. "Events in Tunisia have clearly encouraged people in Egypt to take to the streets, and the encouragement that people take from this can lead to some contagion.
"Whether this will lead to a domino effect in the region is a different question - a number of governments in the region have been relatively fast in acting proactively to lower food prices and increasing subsidies to alleviate the immediate economic pressure."
Mr Fox agreed. "I don't think you can just assume that you're going to have a domino effect from one country to the other," he said. "The fault lines are different in different countries."
