By Samia Nakhoul
CAIRO (Reuters) - With violence sweeping Egypt's cities and the economy lurching deeper into crisis, each passing day is adding new bricks to a wall of mistrust between the Islamist-led government of President Mohamed Mursi and a fractured secular opposition.
Two years after the revolution that toppled Hosni Mubarak, Egypt, the epicenter of the upheavals reshaping the Arab world, is once again gambling with its future.
Writing on Twitter this week as protesters clashed with police in the Suez Canal city of Port Said, Ahmed Said of the liberal opposition Free Egyptians Party asked: "Will the army intervene on the side of the Egyptian people or not?"
General Abdel Fattah al-Sisi, the army chief and defense minister, duly warned on Tuesday that chaos in the streets and political deadlock could lead to "the collapse of the state".
For now at least, this looks more like a shot across the bows of Egypt's bickering politicians than a bid for power, most observers believe. Senior officers told Reuters the army's main concern was to safeguard national security and contain the violence that has enveloped major cities, including three along the strategically and economically important Suez Canal.
The instability has provoked unease in Western capitals, where officials worry about the direction of a powerful regional player that has a peace deal with Israel. The United States, which gives Egypt $1.3 billion in military aid each year, called on Egyptian leaders to make clear violence was not acceptable.
The violence is rooted in popular rage at the failure of Mursi to deliver security, stability, jobs and food and enmeshed with polarized and poorly focused political agendas.
Since the 2011 revolution, the Islamist Muslim Brotherhood, which Mubarak spent his 30-year rule suppressing, has won two referendums, two parliamentary elections and a presidential vote. But, as the renewed turmoil of the past week demonstrates, Egyptians have still to reach anything like consensus on who should govern them, and under what rules.
Power ebbs and flows between a presidency that is beholden to the Brotherhood, a poorly coordinated opposition coalition and the army, the pillar of the old order.
Meanwhile, the Islamist-dominated parliament, dissolved last year by the constitutional court, is in abeyance pending new elections and almost nothing has been done to rebuild crucial institutions such as the police and the judiciary.
Mursi added fuel to the flames late last year by taking over legislative powers until a new parliament is elected and rushing through an Islamist-tinged constitution, endorsed in a referendum where the Brotherhood outmaneuvered an opposition that could not decide whether to boycott or contest the vote.
ARMY'S CENTRAL ROLE
The opposition spurned Mursi's offer of dialogue this week, calling instead for a national unity government and a rewriting of the constitution - in effect, for Mursi to step aside.
"I think the lack of trust is so deep-seated that even if the Brotherhood made good faith gestures I don't know if the opposition could believe them or take them at face value," said Shadi Hamid, director of research at the Brookings Doha Center.
"I think in some ways the well is so poisoned we are talking about a very rough transition (ahead) ... There isn't any way to undo the damage that has been done," he added.
The impasse has led to fears in some quarters that the army could step in. Arguing against such a move is the fact that the Brotherhood-backed constitution enshrines the military's political influence and economic interests, meaning army commanders have little to gain by taking over the day to day running of Egypt.
If discontent against Mursi broadens into another popular uprising, the army's leadership would find itself center stage. "It all depends on how quickly civilians can get organized," said analyst Safwat Zayaat.
Shortly after his election in June, Mursi managed to sideline the military council that effectively took over after Mubarak. Yet the army had a role this week in convincing the president to impose a month-long state of emergency on three Suez Canal cities, Zayaat said, through the National Defence Council on which commanders sit alongside civilian leaders.
Military analysts say that after six decades in power the U.S-aligned generals now heading the army have no wish to see their image tarnished by a new putsch, especially since whoever rules Egypt will soon have to take unpopular economic decisions.
NO SIGN OF STABILITY
A desperately-needed $4.8 billion loan from the IMF is not yet in place, mainly because the aid package would involve cuts to subsidies that eat up a quarter of the budget, further stoking food and fuel-price inflation.
On the streets, there is no sign of the stability the country badly needs to attract investment, tempt back the tourists who provide around a quarter of all jobs, and create opportunities for its overwhelmingly young population.
Simon Kitchen, strategist for investment bank EFG-Hermes, said the post-revolution government inherited a weak economy with a high deficit and big fuel subsidy bill, and that the political standoff between Mursi and the opposition was preventing them from implementing difficult decisions.
"The country is being kept afloat by deposits from Qatar, but the funds are a stop-gap measure to stop the bleeding rather than get money flowing into the country," Kitchen said.
"What the private sector wants to see is not just an IMF agreement but the government demonstrating it has a clear and consistent policy and then operating effectively, transparently and predictably for six to 12 months. Only then will you see a turnaround in the private sector."
Hamid at Brookings doubts a new consensus to restore stability and unlock economic reform is possible in such a combustible climate.
"I think the big thing is going to be the IMF loan to try to stabilize the economic situation. The even bigger thing is the parliamentary elections. It would be a disaster if the opposition boycotts because that would mean the normalization of street politics over institutional politics."
MURSI SITTING TIGHT
Like most observers, Hamid doubts the protesters will be able to force out a democratically elected president who has only been in power for seven months and has inherited a country that lived under 30 years of autocracy and mismanagement.
"Knowing Mursi, even knowing him personally, he won't resign under any circumstance and the Brotherhood will never allow that.
"I also don't think it sets a good precedent for elected leaders to resign in the face of popular pressure. That kind of precedent will be detrimental to the institutionalization of politics", Hamid said.
Opposition conditions for re-entering the political process, furthermore, including holding an early presidential vote and rewriting the constitution, were not realistic, he said.
"You cannot really undo what has already happened. There can be re-negotiations over some controversial articles (of the constitution) but what they are proposing is to start over."
The mistrust goes deeper than demands by the opposition. Mursi and his Brotherhood affiliates believe the liberal opposition is out to destroy them. They see this as an existential battle and that the opposition is acting outside the democratic rules of the game.
Yet if government and opposition cannot reach a consensus, they could take Egypt over the brink from which the army has just warned them to step back.
As the power struggle unfolds, in Tahrir Square, cradle of the revolution, most of the crowd camping are young, unemployed Egyptians who are angry and disillusioned.
Mohammed al-Masry, 27, a sailor, who hasn't been able to find a regular job said: "We want to change the regime. We want to change Mursi ... Prices of food are increasing, unemployment is increasing and so is state violence against protesters."
"Mursi has done nothing except serve the Muslim Brotherhood. He is the president of the Ikhwan (Brothers) and not the president of Egypt," said Ahmed Ibrahim, 19.
Film director Abdullah al-Shamshari, 28, added: "Mursi should break free from the Muslim Brotherhood grip and act as the president of all Egyptians. He is torn between the Brotherhood which lifted him into power and the ordinary people who have legitimate demands."
(Additional reporting by Marwa Awad; editing by Janet McBride)