Moody's downgrades Egypt debt

PARIS, Jan 31, 2011 (AFP) - Rating agency Moody's said Monday it had downgraded Egypt's debt rating by one notch to "Ba2", and changed the troubled country's outlook to negative from stable.

Moody's explained in a statement that its decision was prompted by the "recent significant rise in political event risk," in the country, and warned that a further downgrade was a possibility "in the medium term".

The ratings agency added that it was concerned over "deep-seated political and socio-economic challenges. These include a chronic high rate of unemployment, elevated inflation and widespread poverty. These, together with a desire for political change, have fueled popular frustrations."

Moody's warned that it would "downgrade Egypt's sovereign ratings again if there were a substantial escalation of political volatility, a large fiscal slippage, or evidence of lasting economic damage."

Moody's also downgraded the country ceiling for foreign currency bonds to Baa3 from Baa2 and the country ceiling for foreign currency bank deposits to Ba3 from Ba2.

The move resulted from "the escalating political tensions in the country following the recent uprising in Tunisia, with large-scale anti-government protests taking place daily.

On Monday Egyptian protesters called for an indefinite general strike and a "million man march" on Tuesday in Cairo, upping the stakes in their bid to topple President Hosni Mubarak's creaking regime.

In Moody's opinion, there "is a strong possibility that fiscal policy will be loosened as part of the government's efforts to contain discontent."

Given the rising inflationary pressures any move to increase budgetary expenditure on wages and subsidies would pose fresh problems,

"The public finances in Egypt are already stretched," the agency pointed out in its statement.

However it added that it stood ready to move the ratings outlook back to stable "in the event that political tensions and attendant fiscal and economic risks abate."

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