Political Risk and Contagion
This week Tunisia’s dictatorship fell. So what, you might say? Maybe some transitional hardship but nothing much for the rest of the world to worry about. Think again. This week the five year CDS spreads on Egyptian government debt gained 62bp to 340bp. Morocco saw smaller rises, of only 16bp. Together Egypt and Morocco’s economies are more than 3.5 times larger than Tunisia. France’s Finance Minister called on the credit rating agencies to cut these countries some slack. What’s going on? The Financial Times on 18 January 2010 reported “…amid concerns that the demonstrations that forced Tunisia’s president to flee to Saudia Arabia could lead to similar action elsewhere, investors were reappraising political risk in the Middle East and in North African countries in particular (page 26). How serious is the potential contagion? Can you identify those European multinationals most at risk of contagion? What steps can they take, if any, to limit the downside of this risk? Why? All classic international business questions. I’ll discuss the best answers that I receive in a future blog.