[Armed to the teeth with U.S. weapons, technology and training, Egypt’s military is the most formidable in the Middle East. This could become a major problem for the region, however, if the economic bog into which the country has been rapidly sinking triggers riots and political chaos. In the analysis below, Larry Amernick, savvy editor of The Amernick Letter, offers a fresh perspective as Egypt seeks to break with the West and forge a new, Islamic identity. RA]

February 11 marked the first anniversary of the resignation of Hosni Mubarak. Mubarak’s departure was encouraged by President Obama, who arrogantly remarked, “Egypt will never be the same!” Future U.S. presidents will spend much time and treasure undoing the damage that this administration has done to U.S.  Middle Eastern prestige and influence. Since Mubarak’s ouster,  the Egyptian economy has disintegrated to the degree that foreign reserves are down 50% since January 2011. The local currency, the Egyptian pound, is likely to lose 15% to 20% of its value in 2012. Already, many middle class businessmen are substituting the U.S. dollar  for the beleaguered currency. The last two bond auctions by the government failed as buyers were reluctant to hold worthless Egyptian debt. The average yield on three-year notes rose to 15.91%.

On the heels of these failed bond auctions, Standard & Poor’s lowered its long-term ratings on the National Bank of Egypt, Bank Misr, and the Commercial National Bank of Egypt to a “B” rating and further stated that its long-term view was negative on all three institutions. The National Bank is a state-owned entity so a downgrade on the bank is a proxy for a downgrade for the country.

Corruption and plutocracy are so entrenched that the new Islamic regime will not be able to deliver on its promises for increased economic growth. GDP growth is close to zero and far below the growth rates of 2009 and 2010. As Egypt economically deteriorates, its stock market, as measured by the EGX-30 is up almost 40% this year, while the Market Vector’s ETF (EGPT) is up almost 37% since New Years Day. Stock speculators poured into Egyptian equities, betting that the new Islamic regime will stabilize the economy. When perceptions between bond holders and stock owners are so different, it is the bond holders who usually have a more grounded perception of reality.

Middle Class Flight

With its sovereign conditions deteriorating, the middle class, including a large segment of its young college educated unemployed, are likely to emigrate. This will create a shortage of doctors, lawyers and other professionals. Politically, both the military leadership and the Muslim brotherhood will blame its current problems on U.S. and Israeli interference. There is a large ignorant population that will believe it because Egyptian newspapers have been writing this propagandist argument for a long time.

What is more likely is a state of chaos on its borders as the central authority loses the ability to control both Islamic terrorists and smugglers. Both have a dark history in Egypt. During the past three weeks, American and South Korean tourists were kidnapped and held for ransom by Bedouin tribe members in the Sinai. Additionally, Iranian operatives may take advantage of this renewed chaos to fire on shipping in the Suez Canal. This will inhibit the ability of the U.S. to quickly reinforce its naval presence in the Persian Gulf.

Obama’s Mistake

Egypt is moving out of the Western sphere of influence and will seek a new Islamic identity. Traditionally, it was the leader of the Arabic world, competing for influence with both Syria and Saudi Arabia. Egypt’s leaders know that  a weak President Obama will continue to give it foreign aid despite Egypt’s new anti-American agenda. For his part, President Obama wrongly believes that he must provide foreign aid to maintain the Egyptian-Israeli peace treaty. That treaty will be secure as long as Egypt is under economic duress. Egypt is unlikely to start a war when its treasury is bare and its population is looking for a higher standard of living. If Egypt were to renew hostilities with Israel, it would be denied spare parts and replacements for its U.S. military hardware.

Promising continuing foreign aid to Egypt makes no sense. We are sending a signal that the hostile  behavior of the new Islamic regime is rewarded and not punished. The delusion of the White House is shared by some in the Congress. Senator John McCain defended foreign aid to Egypt, arguing that secular forces would temper Islamic ambitions.

Eventually, some future Congress will hold hearings on the question “Who Lost Egypt?”  Illusions of moderation die hard. When the new civilian government is finally installed, retribution against its enemies will surely follow and the firing squad will be busy. Indeed, the Arab Spring has quickly turned to winter and Obama’s words, “Things will never be the same for Egypt” will come back to haunt him in the November election.

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