Egyptian banks hesitant to lend to government

If you don't borrow from them, we won't lend you money.

"Them" refers to international institutions, "we" refers to local banks.

That's the ultimatum the government seems to be facing ever since the Minister of Finance announced Egypt would not need the international loan it was offered.

On Thursday, the government cancelled an auction of treasury bills due to the high prices demanded by banks. The maximum rate offered was 13.6 per cent on the short-term debt obligation backed by the Egyptian government with a maturity of 9 months, which averaged a yield of 12.952 per cent.

But this doesn't reflect any fear of the government's defaulting, say analysts. Rather, banks are hedging for concentration risk rather than for the government’s default risk, believes Simon Kitchen, a strategist with EFG Hermes.

"Local banks’ balance sheets are currently crowded with governmental debt which incites banks to raise interest rates to make up for the increased risk," he says.

The average yield on the country’s one-year bills has surged by 2.54 per cent, compared with the last pre-revolution auction, to reach 12.982 per cent, the highest level since November 2008.

Hani Genena, chief economist at Pharos Securities thinks foreign investment institutions are reluctant to invest in Egypt’s debt, leaving local banks on their own to satisfy the appetite of the country's deficit-burdened budget.

"Foreigners comprised around 25 per cent of local debt purchases in September, now they take up less than 1 per cent," Genena explains.
"They are weary of the foreign exchange risk, where the Egyptian pound would lose value, especially with depleting international reserves and a growing balance of payment deficit."

T-Bill net issuance in the first 11 months of the 2010/11 fiscal year has reached its highest ever levels -- LE113 billion -- pushing interest rates upwards.

The government has been selling fewer T-bills than it has offered in recent auctions. On Sunday, it asked for 91- days bills worth LE2 billion yet only sold around LE1 billion. It sold them at average yields of 12.112 percent, up from 12.095 percent the week before..