Erdogan Crisis Driving Bond Risk Closer to Russia: Turkey Credit
Turkish Prime Minister Recep Tayyip Erdogan’s stand-off with protesters is threatening to send investor perceptions of the nation’s credit risk above Russia’s for the first time in seven months.
The cost to protect against losses in Turkish debt using credit-default swaps rose 41 basis points since May 31, when anti-government demonstrations erupted, to 172 yesterday, according to data compiled by Bloomberg. That’s narrowed the gap with higher-rated Russia to 10 basis points from 25 at the end of last month, the data show.
The unrest is threatening to drive away investors, who had been lured to Turkey by higher yields, falling debt levels and credit-rating upgrades. The yield on the nation’s January 2030 dollar bond has climbed 50 basis points since the protests began, compared with a 26 basis-point increase for Russia. Hundreds of riot police raided Istanbul’s Taksim Square today.
“Many preferred Turkey to Russia on the view that it had become politically stable, transparent and democratic, contrasting with Putin’s Russia,” Richard Segal, head of international credit strategy at Jefferies Group Inc. in London, said in e-mailed comments yesterday, referring to President Vladimir Putin. “That comparison is being revisited. It’s another sign that the long-term bullish Turkey story has come to an end.”
Erdogan warned demonstrators and lashed out against financial speculators over the weekend for seeking to profit from the unrest. At least three people have died in more than a week of clashes as protesters accuse Erdogan of increasingly autocratic behavior since police cracked down on a rally in Taksim Square. Clashes were still going on today two hours after police stormed the square, which protesters had blocked off with a jumble of police barricades and park benches.
The lira gained 0.5 percent to 1.8935 against the dollar at 10:41 a.m. in Istanbul today, reversing earlier losses of as much a 0.4 percent, after central bank took tightening measures.
The amount of funding at policy rates may be reduced temporarily and can be below the minimum amount declared for ordinary days, the central bank said in a statement. If bank deems it necessary, unsterilized foreign-exchange sale auctions and direct interventions can be used, the bank said.
Credit-default swaps climbed seven basis points to 179 and yield on Turkey’s two-year notes rose three basis points, or 0.03 percentage point, to 6.53 percent. The rate has jumped 174 basis points through from a record low on May 17, paring declines in the past year to 265 basis points, the biggest drop among major emerging markets. The sell-off in the past three weeks comes amid growing speculation the Federal Reserve will curb its $85 billion a month purchases of Treasuries and mortgage bonds used to stimulate the U.S. economy.
“Heightened political tensions in major cities and lessening appetite for emerging-market assets due to Fed tapering are seen as risk factors for Turkish investors,” Isik Okte, a strategist for the investment unit of state-run lender Turkiye Halk Bankasi AS (HALKB) in Istanbul, said in e-mailed comments yesterday. “As the investment community debates which investments going forward are the riskiest under Fed tapering, Turkey fixed income and equities are on most investors’ lists.”
Foreign investors sold $1.1 billion of Turkish lira debt in the week ended May 31, according to the latest central bank data.
The lira has weakened 4.9 percent in the past month, the worst performing emerging-market currency after South Africa’s rand in Europe, the Middle East and Africa. The ruble slipped 0.8 percent today and credit swaps on Russia rose seven basis points to 189.
The biggest Russian protests during Putin’s more than a decade in power following parliamentary elections in December 2011 sparked the first monthly decline in 10-year ruble bonds in three months. That slump was followed by a three-month rally.
Turkey was raised to Baa3, the lowest investment-grade ranking, by Moody’s Investors Service on May 16. That’s two steps below Russia.
The protests in Turkey may wind down as they did in Russia, according to Marco Santamaria, who helps oversee $24 billion in emerging-market debt at AllianceBernstein Holding LP (AB) in New York.
“If the unrest continues, it is entirely conceivable that Turkish CDS spread might widen beyond Russia’s,” Santamaria said by e-mail yesterday. “I would not expect the situation to deteriorate much. In much the same way Russia did last year, I suspect the protests will tend to settle down.”
The amount of Turkish debt protected by credit-default swaps is rising, with a total of 9,321 contracts covering a net $7.5 billion of debt outstanding as of May 31, up from $6 billion a year ago, according to the Depository Trust & Clearing Corp. Turkey is now the eighth most-protected government, compared with 11th last year.
The contracts, whose price increases as perceptions of creditworthiness deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege.
Credit-default swaps on Turkey were the third most actively traded among 1,000 entities tracked by the DTCC in the week through May 31, following Brazil and Italy.
“Turkey was a hype recently, seeing massive capital inflows, stable currency, ratings upgrades, improving growth outlook,” Viktor Szabo, who helps oversee $11.8 billion at Aberdeen Investment Management Ltd. in London, said in e-mailed comments yesterday. “Capital outflows may take away all that. It was a one-way flow for quite a long time, so it’s time for some correction.”
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