How Gold Is Mined: EL-ERIAN: Anyone Following Egypt Needs To Keep An Eye On One Useful Measure, And It's Not The Stock Market

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Mohamed El-Erian REUTERS/Fred Prouser

Mohamed A. El-Erian, CEO and co-CIO of PIMCO, takes part in a panel discussion titled "Global Markets in Uncertain Times" at the Milken Institute Global Conference in Beverly Hills, California April 29, 2013.

$('.icon-tooltip').tooltip(); Mohamed El-Erian

Mohamed El-Erian is CEO and co-CIO of PIMCO.

Recent PostsEL-ERIAN: The Next Few Days Will Be Critical For The Global...EL-ERIAN: The Fed Better Be Right About The EconomyEL-ERIAN: The Market 'Sucking Sounds' Are Getting Louder As Four...With all the focus on Egypt today, people are scrambling to find a simple market-based measure that speaks to both the extent of the economic disruptions and the potential financial spillover effects on other countries.
The most commonly-viewed Egyptian chart – stock market prices – is not the right one. There is another one; and while better (and, maybe, even the best in relative terms), it is far from comprehensive.

This better data series measures the spread on the 5-year CDS (credit default swap). It is a good – not perfect – market indicator of sovereign risk; and it dominates the information content provided by the much more popular stock market index.

The higher the spread (and it just traded at around 1,000 basis points), the harder it is to encourage investment in new plant and equipment; the more difficult and expensive it is to secure trade financing (including for critical imports of food stuffs and other basic needs); and the lower the job and income opportunities for average Egyptians. And all this speaks to the bigger issue: A struggling economy is both a source and a consequence of Egypt’s current political tensions.

As insightful as this data series is, it does not capture however the potential spillover effects. Indeed, even the analytics of this particular contagion question is quite complex.

Measured by traditional economic and financial variables, Egypt’s regional and global network effects are quite limited. This is true in terms of the usual measures, including trade links, global demand and supply influences and cross-border financial interactions.

But this does not mean that Egypt has no systemic effects. It remains the largest and most influential country in the Arab region. It is a significant geo-political actor in an important part of the world. And the demonstration effects could extend quite far and wide.

The bad news is that there is no single simple measure that comes anywhere near to capturing all this. The good news is that the CDS spread provides useful insights into one of the underlying contributing factors.

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The better indicator of sovereign risk.

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