EGYPT: Political, Economic Uncertainty Fueled by Fuel

Bottom Line: As Egypt's political uncertainty soars unabated, two major oil supply deals with Iraq and Libya are falling through without the financing guarantees, while energy shortages threaten to lend greater impetus to the prevailing unrest.

Analysis: Egypt is cash-strapped and its only hope of securing agreed-on oil supplies from Iraq and Libya are being dashed as the government fails to come up with the necessary bank guarantees. In March, Libya agreed to give Egypt 1 million barrels of crude a month for up to a year on soft credit terms, while Iraq offered up 4 million barrels of crude per month (at over $100/barrel) with no-interest, deferred payments for three months. However, shortly after agreeing to the deal, Iraq asked for a down payment (about $1.2 billion) or a same-value bank guarantee, which destitute Egypt can't come up with. The Iraqi government rejected a letter of credit from Egypt Central Bank guaranteeing the $1.2 billion. Libya is likewise looking for a guarantee for liabilities that Egypt hasn't materialized.

Recommendation: Egypt's diesel shortage has been fueling continued unrest since last year, and it is having the snowball effect of leading to rising food costs and increasingly frequent blackouts. It will be this in the end that is the undoing of a government that is only hanging on by a threat.