Forget the Court Rulings and Elections! Fitch Downgraded Egypt

It was a tumultuous 48 hours for Egyptians. First, the Supreme Constitutional Court – a body of judges appointed by former President Hosni Mubarak – issued two rulings: the Political Isolation Law was unconstitutional and articles governing Egypt’s parliamentary elections of late 2011 were invalid. These rulings, in turn, meant that Ahmed Shafiq, Mubarak’s last prime minister, could legally contest the second round of the presidential elections and the Islamist dominated parliament was illegitimate. Then, the country’s ruling military junta – the Supreme Council of the Armed Forces (SCAF) – issued a declaration dissolving the legislature, assumed full legislative authority, set about issuing a decree outlining the criteria to be used to form a new Constituent Assembly responsible for drafting a new constitution, and surrounded parliament with the repressive apparatuses of the state. Finally, on Saturday, Egyptians started going to the polls to elect their still undefined executive.
These machinations received global media coverage and induced considerable public outcry. At the same time, another event occurred that received much less attention but will have profound effects for Egyptians. On 15 June, the credit rating agency Fitch downgraded Egypt’s creditworthiness. The downgrade, more assuredly than the dissolving of an ineffectual parliament or the election of a constitutionally ambiguous president, will have far-reaching consequences for Egyptians. Most disturbingly, the decision stands to negate the goals of, and small gains made by, the Egyptian “revolution.” Political Machinations
Make no mistake - the politics currently being played out in the Egyptian polity are not radical. They do not even rise to the standard of being political discontinuities. The presidential contest, the court rulings and the military’s usurpation do not mark changes in domestic power relations. Instead, they are instances of the persistence of established relations of domination and subordination in the Egyptian political economy.
First, the presidential elections represent a long-running intra-class battle in Egypt. Different elements of the capitalist class are battling each other for primacy in the Egyptian political economy. Shafiq represents the interests of the monopoly capitalist class that was favored under the Mubarak regime and close to the heir apparent, Gamel Mubarak. Muhammed (the Spare) Morsi and the Muslim Brotherhood, on the other hand, represent the interests of the domestic, competitive capitalist class. The monopoly class accumulates wealth by being bound up with the state. Until 2011, it enjoyed, for example, parliamentary dominance and access to politicized credit. As the label suggests, the domestic, competitive class accumulates wealth by successfully competing in the domestic market.
These social forces have clashed before. In 2007, members of the Brotherhood were arrested and jailed by the Mubarak regime and 72-Brotherhood-related companies were confiscated. Prominent members of the group such as Hassan Malek had LE120 million confiscated by the regime and Khairat al-Shater, the group’s first presidential nominee, had LE80 million confiscated. [1] More recently, and more spectacularly, the two social forces clashed again in the infamous 2 February 2011 Battle of the Camel in Tahrir Square. The monopoly capitalist class literally laid siege to the competitive class, while the military awaited the resolution assured of accruing benefits and workers and peasants suffered disproportionately as fodder. Contemporarily, the means are different – ballots instead of bullets and camel mounted assailants – but the battle persists, with workers and peasants being further immiserated and their interests continuing to be abused. [2]
Second, this is not the first time that the Supreme Constitutional Court has ordered the dissolution of parliament. It is the third time. According to an article in the New York Times, the court’s decision should not have come as a surprise.
Nathan J. Brown, a professor of political science at George Washington University, noted that the constitutional court had sought the dissolution of Parliament at least twice before, in 1987 and 1990, for similar reasons. As it did Thursday, it ruled in each case that election officials had impermissibly allowed political parties to compete for seats designated for independents. [3]
There is nothing new in the court’s ruling on the legitimacy of the parliament. The court has consistently found that political parties have illegally competed for the designated independent seats in the Egyptian legislature. The only “difference” in this instance is that the court’s ruling was issued in a more timely fashion. [4]
Third, despite recent statements, the court ruling and SCAF’s usurpations of powers do not constitute a coup. The Brotherhood has opportunistically, and in clearly politicized fashion said that the ruling, issued, they claim, at the behest of SCAF, represents a “complete coup d’etat.” [5] Similarly, Shadi Hamid of the Brookings Institute characterized SCAF’s actions as “an all-out power grab by the military.” [6] Both are correct – SCAF committed a coup; they are wrong about the timing. The Egyptian military did not seize the levers of political power on 14 June 2012, but on 11 February 2011. Egypt’s coup is already a year and a half old. It is only now that the nationalistic luster of the coup is really tarnished. Ultimately, the recent machinations represent the continuation of the military’s overt and direct dominance of the Egyptian political economy. Ratings Downgrade and Capital Access
Credit rating agencies determine a sovereign entity’s access to capital markets; whether it can raise capital by issuing treasury bills and bonds, and how much it will have to take from future revenues in order to service the interest on the paper it issues (the money it borrows). Credit rating agencies also monitor and surveil state policies and reward and punish states according to how the policies effect their ability to service their financial obligations. Despite their poor performance in anticipating the East Asian crisis, or more recently the sub-prime mortgage crisis, the rating agencies remain “central to the regulatory system of modern capitalism and therefore to governments everywhere.” [7]
On 15 June, Fitch Ratings downgraded Egypt’s creditworthiness. “Fitch Ratings has downgraded the Arab Republic of Egypt’s Long-term foreign currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-’ and Long-term local currency IDR to ‘B+’ from ‘BB’.” [8] Both ratings have a negative outlook. Two reasons were given for the two-notch downgrade: 1) Egypt faces “increased uncertainties surrounding the political transition following yesterday’s ruling by the Supreme Constitutional Court to annul parliamentary elections and dissolve parliament; and 2) domestically, financing challenges have increased as evidenced by increasing treasury bill yields, and there has been an “increased resort to foreign currency linked domestic debt.” [9]
Since Mubarak was deposed early last year, the ruling military junta has increasingly relied on domestic banks to finance a persistent and growing budget deficit. Among other things, this has resulted in the yields on short-term treasury bills hitting record highs. According to Al-Masry Al-Youm, “[t]he average yield on 182-day treasury bills rose to 15.359 percent at auction on Thursday, their highest in at least a decade. After tax, this translates into an effective yield of around 12 percent.” [10] This, in turn, has drained the Egyptian political economy of capital.
On the same day Fitch Ratings downgraded Egypt’s creditworthiness, the CBE announced it would start selling 28-day repurchase agreements in July. The 28-day repurchase agreements are an attempt to alleviate Egypt’s liquidity crisis. [11]
Egypt’s historically dependent political economy is now experiencing a catastrophe. Foreign investment has slowed to a trickle; tourism rents have fallen precipitously; foreign reserves are severely depleted; and generous promises of aid, particularly from the Gulf states, have been broken. The Egyptian state has had its access to international capital markets increasingly limited and, consequently, has had to borrow more heavily domestically. This has drained the Egyptian political economy of capital and created a liquidity crisis. The Fitch downgrade will only exacerbate this crisis. Implications of the Downgrade for Egyptians
Similarly disastrous effects of credit downgrades and liquidity crises (along with the inevitable currency devaluations) have been wrought in myriad societies, most recently Greece. Egypt is now poised to suffer the same devastation. Three specific effects are notable.
First, like Egypt, Greece has recently had elections; two, in fact. These political exercises have not changed the draconian austerity measures imposed on the hemorrhaging society. Now, while Egypt does not have the welfare state with its pensions and education infrastructure Greece once had that can be gutted, it does have a structural unemployment which will only be made worse by the Fitch downgrade. No one is opening factories in Egypt; certainly not when those with capital can profit handsomely from a state that has to pay higher and higher yields on securities just to cover its budget shortfalls. Like so many other places around the world, in Egypt, financial instruments are creating and further consolidating wealth in the hands of a small class. Neither Shafiq nor Morsi will change this condition; neither has an interest in changing it.
Second, as is the case in all capitalist societies, unemployment is a problem for the unemployed; for the capitalists, it is a boon. In Egypt, as in Greece before it, the ratings downgrade and the compounding liquidity crisis will be used to discipline all labor, and specifically organized labor. Independent, genuinely representative unions are still largely embryonic in Egypt, the state-controlled Egyptian Trade Union Federation’s (ETUF) monopoly on labor representation having only recently been ended. The Fitch downgrade and liquidity crisis will be instrumentalized to abort the development of workers’ consciousness and organization in line with their shared ideas and material realities.
Third, the relatively unheralded changes in the Egyptian political economy will result in the further privatization of public assets. Privatization started in Egypt in 1991 as a condition of the US forgiving Egyptian debt as “reward” for Egyptian policy during the 1990-1991 Gulf War. The practice accelerated after 2004 and had effectively pillaged the political economy by 2011. Privatization, and the economic dislocations and abuses it induced, was a major impetus behind the eventual ouster of Mubarak. While some privatized industries have been renationalized (even under Mubarak) and others seized pending investigations into allegations of corrupt sales, the Fitch downgrade will surely result in a muting of calls to further reverse the practice. What is referred to as the “structural adjustment” that attends a credit rating agency’s devaluing of a state’s securities results in all manner of privatizations, of water, manufacturing, even islands. The Egyptian experience will be no different.
The 2011 protests which have, in labyrinthine fashion, ultimately resulted in the current presidential elections were initially rooted in demands for social justice. While they reached a crescendo last year, they started with strikes in al-Mahalla al-Kobra in 2006 which were directed, in part, at realizing independent and genuine union representation. Over the same period, workers in Helwan and Torah resisted the privatization of their factories. The credit downgrade, more so than any court ruling or presidential election, will have sweeping implications for the remaining meager vestiges of social justice in Egypt. The Fitch devaluing has sounded the death knell for the goals of the Egyptian “revolution.” Notes
[1] Ahmed Feteha, “Muslim Inc: How rich is Khairat El-Shater,” Al-Ahram online, 3 April 2012, accessed 16 June 2012,
[2] Sean F. McMahon, “Egypt and Neo-Gramscian Theory: Social Forces, the State and the Middle East Order,” in Egypt’s Tahrir Revolution: Perspectives and Prospects Sean F. McMahon, Dan Tschirgi and Walid Kazziha eds (Boulder, CO: Lynne Rienner Publishers, forthcoming).
[3] David D. Kirkpatrick, “Forces Surround Parliament in Egypt, Escalating Tensions,” New York Times, 15 June 2012, accessed 15 June 2012,
[4] Kirkpatrick, “Forces Surround Parliament in Egypt, Escalating Tensions,” New York Times.
[5] Mohamed Fadel Fahmy and Josh Levs “Some cry ‘coup’ as Egypt’s high court annuls parliament, military extends power,”, 15 June 2012, accessed 15 June 2012,
[6] Kirkpatrick, “Forces Surround Parliament in Egypt, Escalating Tensions,” New York Times.
[7] Timothy Sinclair, “Credit Rating Agencies and the Global Financial Crisis,” economic sociology _ the European electronic newsletter 12(1) November 2012, 4.
[8] “Fitch Downgrades Egypt to ‘B+’; Outlook Negative,” Fitch Ratings, accessed 15 June 2012,
[9] “Fitch Downgrades Egypt to ‘B+’; Outlook Negative.”
[10] “Central Bank to start 28-day repos in July,” Al-Masry Al-Youm, 15 June 2012, accessed 15 June 2012,
[11] “Central Bank to start 28-day repos in July.” Sean F. McMahon is Assistant Professor of Political Science at the American University in Cairo. He is co-editor, with Dan Tschirgi and Walid Kazziha, of Egypt’s Tahrir Revolution: Perspectives and Prospects forthcoming from Lynne Rienner Publishers.