* Egypt earlier turned down $3 bln IMF package, may
* Cairo says open to IMF ideas, in talks with Gulf Arabs
* IMF has said it remains willing to lend
* Budget deficit surged in wake of anti-Mubarak uprising
By Dina Zayed and Edmund Blair
CAIRO, Sept 20 Yields at Egyptian Treasury bill
auctions have hit levels last seen during the 2008 global
financial crisis and traders said on Tuesday they could go
higher still if the government does not secure external funding
for its budget deficit.
The government, which turned down a $3 billion loan package
from the International Monetary Fund in June, has said it will
rely on the local market to plug its financing needs, which have
mushroomed after an uprising that ousted president Hosni Mubarak
ealry this year.
Egypt's banks are feeling squeezed and demanding higher
yields at debt auctions, sometimes too high for the central bank
to accept. At the current pace, the government is seeking to
raise more than 50 billion Egyptian pounds ($8.3 billion) a
month, debt traders estimate.
One trader said Cairo, which is discussing financing with
Gulf Arab states and also said this week it is open to
cooperation with the IMF, could not rely on funding from local
banks for longer than a few more months.
The average yields on T-bills issued on Tuesday were 12.930
percent for 91-day and 13.239 percent for 182-day , levels
last seen during a spike in October 2008 when the global
financial system was strained.
In 2008, yields quickly fell back, but there is no sign of a
respite now. Egypt cancelled an auction of two- and three-year
bonds on Monday, which traders said was because banks demanded
yields that were too high for the government to accept.
Egyptian banks are reluctant to commit long-term with yields
rising, while the instability of global markets and a slowing
world economy are deterring interest in Egyptian debt among
private foreign investors.
"The Finance Ministry is under a lot of pressure. There are
no foreigners in the market, reserves are decreasing and there
is no revenue coming in," said one trader at an Egyptian bank,
who like others asked not to be named because of the sensitivity
of the issue.
Foreign reserves have tumbled $11 billion since December to
$25.01 billion in August. Although the pace of the fall has
slowed, reserves have continued to edge lower.
"The deficit is increasing and there is no money coming in.
It seems they are looking at the IMF and the World Bank again,
after they said they rejected the initial loan," the trader
Finance Minister Hazem el-Beblawi told Reuters on Monday
that he was open to "all sorts of cooperation" when he holds
meetings at the IMF and World Bank this month. He also said he
was discussing financing with Saudi Arabia and the United Arab
Emirates that could exceed $5 billion, but gave no details or a
Masood Ahmed, director of the IMF's Middle East and Central
Asia department, told Reuters last week that the Fund remained
willing to lend money to Egypt if Cairo changed its mind and
asked for assistance.
He also said the IMF was encouraged by some economic policy
changes planned by the Egyptian government, including reforms to
its subsidy system that would improve the distribution of
cooking gas to poor people, and moves to raise the prices paid
to farmers for their crops.
A Cairo-based trader pointed to an upcoming auction of
six-month T-bills as a sign of the pressure on the government.
In more normal times, the central bank, acting on behalf of the
Finance Ministry, would offer 1.5-2 billion pounds worth of
bills, he said.
On Thursday, it will offer 182-day bills worth 4 billion
pounds, hiking the amount without explanation after initially
saying it would offer 2.5 billion pounds.
Central bank officials could not be reached to comment.
"I don't believe by the end of the quarter or end of the
year it will be more optmistic," the Cairo trader said. He added
that tensions in the debt market were related to political
uncertainty, "so it won't calm down or be stable unless we have
a clear view of what Egypt will be in six months or one year".
At the current rate, he said, one-year T-bills could have
yields of 17 or 18 percent at the beginning of 2012, up from
around 14 percent now, unless Egypt found fresh sources of funds
outside the country.
Before the uprising destabilised the economy, the
government was raising about 40 billion pounds a month, compared
with the current pace of more than 50 billion pounds, he
Another trader was more sanguine, however. "The local market
is greedy. Each time it tries to get a higher yield but in
general, the local market is capable of financing the deficit,"
he said, although he added that pressure on local banks was
When Egypt turned down the IMF package in June, the
financial terms and policy conditions attached to the loans were
not onerous; a major factor behind the decision appeared to be
the reluctance of the country's new government to be seen to be
depending on foreign aid.
The government also said it had revised its budget so that
the deficit would be 8.6 percent of gross domestic product in
the 2011/12 fiscal year, down from an original forecast of 11
percent. Economists said the new figure was overoptimistic,
however, particularly since Egypt is struggling to get growth
back on track.
The economy grew more slowly than the government had
forecast in the year to June 30, expanding by 1.8 percent. The
government forecasts growth of 3-3.5 percent in 2011/12 but
analysts say that prediction may also prove too upbeat.
(Editing by Andrew Torchia)