Egypt’s Credit Rating Cut by Moody’s

April 11, 2013

Unlocking Word Meanings
Read the following words/expressions found in today’s article.

1. default 
[dih-FAWLT] (n.) – failure to pay a loan or borrowed money
Example: The young couple’s lack of income made them in default on their mortgage.
2. overthrow [OH-ver-throh] (v.) – to remove or bring down a person from power, especially by force
Example: The overthrow of the cruel dictator ended the suffering of the country.

3. deficit [DEF-uh-sit; British also dih-FIS-it] (n.) – lack or shortage in the required amount
Example: The CEO cut on spending due to the company’s budget deficit.

4. expenditure [ik-SPEN-di-cher] (n.) – the amount of money spent
Example:   Monthly expenditures should not exceed one’s monthly salary.

5. tranche [trahnch, trahnsh; French trahnsh] (n.) – an installment or a part of the whole
Example: The company will receive the loan in three tranches starting April of this year.

Read the text below.

Moody's, one of the world’s biggest credit rating agencies, has once more lowered Egypt's credit rating, saying that the country’s unstable political situation and poor government finances increase the risk of a default within five years.

Since the overthrow of former Egyptian president Hosni Mubarak in 2011, the country has been experiencing economic crisis. The government has been troubled with a decreasing currency reserve, a falling tourism industry, a rising budget deficit and a continued political unrest often characterized by violent street protests.

The continuous decline in Egypt's economy caused Moody's cut in Egypt's economic rating, downgrading from B3 to Caa1 or high credit risk to very high credit risk. Moody’s has downgraded Egypt six times since January 2011. And with the new rating having a negative outlook, the country’s rating can further decrease.

Moody's predicts that Egypt may have a 10% chance of defaulting on its debt by next year, which is slightly below the 40% default possibility within the next five years.

According to Jason Turvey, an assistant economist at Capital Economics in London, Egypt’s financial position is very concerning. The country’s budget deficit has been increasing due to the government's subsidy expenditures. But if the International Monetary Fund (IMF) approves Egypt’s loan, the country could prevent further economic decline.

Egypt’s president Mohamed Morsi hopes to sign a $4.8 billion loan with IMF and get its first tranche by the end of June. The government also expects Egypt’s first Islamic bonds to help the economy recover.

Viewpoint Discussion
Enjoy a discussion with your tutor. 

Discussion A

·         How do you think can a credit rating affect a country’s economic condition?
·         In your opinion, what other measures can Egypt do to save its economy?

Discussion B

·         What factors would you consider before lending money? Please explain your answer.
·         How would you handle a borrower who cannot pay his debt? Please explain your answer.


April 11, 2013