Friday, 28 January 2011 15:02

Egypt's Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!!

We now know why I had my team specifically model in the fuzzy, yet quite relevant social unrest factors into our Sovereign Contagion Models. Egypt appears to have erupted, and I will illustrate the path in real time using the roadmap that we created to predict such an event igniting a powder keg much earlier last year. First let’s check out the headlines:

  1. The Internet goes dark in Egypt – First, Egypt blocked the social networks, now Egypt has blocked the Internet itself
  2. Egypt Communications Cut As Protests Continue (WSJ) – Earlier this week, blogs and social networks were full of calls to take to the streets to bring down the regime of Egyptian President Hosni Mubarak.
  3. Egyptians Extend Protests, Shun Ban (WSJ)-
  4. Report: Egypt Bans Facebook, BlackBerry Internet Service | News Jan 27, 2011 Report: Egypt Bans Facebook, BlackBerry Internet Service Social networks have also played an important role in the uprising in Tunisia
  5. Egypt bans protests after unrest, activity continues online Egypt bans protests after unrest, activity continues online After activists used social networking and blog sites to coordinate protests
  6. Interactive Map Of Recent Food Riots And Price Hikes – … countries with high poverty and large population like Egypt the food riotes are expected
  7. Investors Flee to Dollar, Bonds On Growing Mideast Violence – The dollar and U.S. Treasurys rose Friday as concerns that protests in Egypt will intensify and spread across the Middle East drove investors to seek safer assets.
  8. Egypt Protestors Defy Curfew; Clinton Calls for Non-Violence
As you can see, a common theme in many of these headlines is the attempt by the Egyptian government to censor citizen communications via the Internet. Despite this, up to 50,000+ protestors have taken to the streets, complete with deaths and police/military violence. To attempt to censor the Internet is an futile effort as you can see from the Al Jazeera live stream (over the Internet) as well as their live camera streams.

Now, what is it that has the Egyptians in such an uproar? Well, let’s turn to that other source that has been the brunt of massive efforts to censor their Internet presence. By the way, many of these cables have been faxed in order to get around the Egyptian internet ban, including one regarding Lebanese children being shipped to (or through) Egypt for a organ harvesting operation. Heavy stuff!

So, what does all of this have to do with the Pan-European Sovereign Debt Crisis? Well I have already demonstrated the high correlation exhibited in both the equity and fixed income markets (yield), particularly since the most recent crash.

Here’s the home page of CNBC as I type this…

You can guess what Europe and Asia did. Now, as excerpted from Japanese Downgrade Illustrates Potential Paths To Contagion:

Now, lets reference the subscription “BoomBustBlog Sovereign Contagion Model“, wherein we spent many analyst man/months to create a realistic model to capture the potential for social unrest, financial and economic contagion as they could skip across sovereign borders, continents, asset classes and hemispheres. Most analysts, investors and financial pundits look at the cross correlations between countries this way…

foreign claims of PIIGS

What we set out to do was to adjust the pathways of apparent pure financial contagion with several, real world factors. Let’s see how close we came (this model was published in May of 2010. Professional subscribers can find this on page 15 of this document: File Icon Sovereign Contagion Model – Pro & Institutional (retail subscribers must use this document – icon Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46))

Closest thing you can get to a crystal ball? No, just an objective, empirical approach from a realistic perspective. None of that bull or bear crap, not being pessimistic nor optimistic – just realistic. While this model is far from exact, and has ambiguity as does any other model (of real life) it goes a long way in illustrating “realistic” paths to contagion – and as you can see there was a very material chance of this breaking out in the middle east and also a material probability that it can and will spread along financial markets. We are working hard to release an updated to this model next week , along with a proprietary currency model.

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the socio-political, socio-economic, and the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

See the entire Pan-European Sovereign Debt Crisis series here.

Summary of the Contagion Model Methodology

  • We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
  • In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors – a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
  • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
  • The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.

Subscribers can download the current production models here:

Classified By: Ambassador Margaret Scobey for reasons 1.4 (b) and (d). 

1. (C) Summary and comment: Police brutality in Egypt
against common criminals is routine and pervasive. Contacts
describe the police using force to extract confessions from
criminals as a daily event, resulting from poor training and
understaffing. Brutality against Islamist detainees has
reportedly decreased overall, but security forces still
resort to torturing Muslim Brotherhood activists who are
deemed to pose a political threat. Over the past five years,
the government has stopped denying that torture exists, and
since late 2007 courts have sentenced approximately 15 police
officers to prison terms for torture and killings.
Independent NGOs have criticized GOE-led efforts to provide
human rights training for the police as ineffective and
lacking political will. The GOE has not yet made a serious
effort to transform the police from an instrument of regime
power into a public service institution. We want to continue
a USG-funded police training program (ref F), and to look for
other ways to help the GOE address police brutality. End
summary and comment.

A Pervasive Problem

2. (C) Torture and police brutality in Egypt are endemic and
widespread. The police use brutal methods mostly against
common criminals to extract confessions, but also against
demonstrators, certain political prisoners and unfortunate

Last modified on Monday, 31 January 2011 06:19


  • Comment Link Nicholas Biniaris Monday, 31 January 2011 06:05 posted by Nicholas Biniaris

    I read your website for quite a time. You seem to have grasped the great social upheavals as a crucial component of the economic reality. The M.East revolution is just a foreplay of what is coming. Watch S. Arabia and Pakistan. The next mini nuclear war is at hand.

  • Comment Link macfly Monday, 31 January 2011 01:53 posted by macfly

    Great research, I'd love to see how you put all that together.

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