Should the markets be worried about Egypt?
Market distress increased last week because civil unrest in Egypt, and as that has gotten even worse over the weekend, market distress will likely continue.
Should markets be worried then? Well, that depends on what happens. There are essentially three scenarios:
1) The Mubarak regime holds on to power.
2) A secularist democratic opposition takes over.
3) The islamist fundamentalist Muslim brotherhood takes over.
In the two first scenarios nothing will happen to the world economy, apart from an insignificant short-term effect from the depressing effects on the Egyptian economy caused by the unrest. In the third scenario some problems could arise. Not so much because of the Egyptian economy. GDP at current exchange rates was only $215 billion in 2010, less than in Israel and Finland, and less than 1.5% of the U.S. economy, so the world economy would barely notice a weakening of the Egyptian economy.
What could cause unrest however would be if the Muslim brotherhood would decide to take a confrontational stance against the United States and Israel by for example closing the Suez Canal or to start a war with Israel together with Syria and Hezbollah using the large quantities of technologically advanced weapons Egypt has received from the United States the last three decades. This could further destabilize the region and cause some disruptions in oil shipments.
That would have a significant negative effect on the global economy. The risk of that is small, but markets are right to price in a small risk.
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