PKK Peace Talks Threat Seen Passing as CDS Climb: Turkey

Investor concern that peace talks between Turkey’s government and the Kurds risk failing will probably fade, helping to boost sentiment toward the nation’s assets, according to Odea Bank AS and Standard Bank Plc.

Credit-default swaps on Turkey, contracts insuring the country’s debt against non-payment, climbed 92 basis points in the past three months, the fourth-biggest increase among emerging markets in Europe, the Middle East and Africa, according to data compiled by Bloomberg as of last week’s close. They fell to the lowest level on record of 112 on May 9, a day after militants from the Kurdistan Workers’ Party, or PKK, began withdrawing from Turkey following a call for peace by their imprisoned leader Abdullah Ocalan.

While HT newspaper reported July 30 that Ocalan may end his support for talks amid frustration over the “lack of peace,” the process will probably continue and help Turkish assets, said Inanc Sozer, an economic-research manager at Odea in Istanbul. Peace talks helped investor sentiment earlier this year amid the promise of an end to the fighting between Turkey and the PKK that has cost hundreds of billions of dollars and seen tens of thousands of lives lost since 1984.

“The likelihood of a positive outcome from the ongoing peace process may help Turkey drive down the risk premium in assets,” Sozer said by phone on Aug. 2. “The fact that talks are ongoing is positive.”

Credit Positive

Prime Minister Recep Tayyip Erdogan told lawmakers in February that he was ready to sacrifice popularity in search of a solution to the 30-year conflict. Ocalan called for militants to cease their armed conflict the following month. Moody’s Investors Service said in April that Turkey’s peace process with the Kurds was a “credit-positive step,” before raising the country to investment grade on May 16.

Kurdish militants have started to withdraw from Turkey and the number that have left may be a little above 15 percent to 20 percent of the total, Bulent Arinc, deputy prime minister, said in a televised interview on state-run TRT Haber TV on July 29.

“The prime minister and we as the government are going to pursue the resolution process until its end,” he said. “We see this as Turkey’s last, big chance.”

The government needs to push through parliament a series of changes by November to keep talks intact, Hasip Kaplan, a legislator with the pro-Kurdish Peace and Democracy Party, said by telephone on July 31. Those changes include an amnesty for PKK fighters allowing them to return after laying down arms in northern Iraq, and abolition of a 10 percent election threshold needed to gain seats in parliament, he said.

Tricky Commitments

HT newspaper’s report cited Ocalan’s relatives who visited him in prison on July 29. Members of PKK may begin to return unarmed from Oct. 15, Hurriyet newspaper reported two days later, citing Ocalan, without revealing how it got the information.

Erdogan’s ruling Justice and Development Party may find it “tricky” to make such political commitments in the wake of anti-government protests that roiled the country in June, Tim Ash, chief emerging-market strategist at Standard Bank in London, said in an e-mail on Aug. 1.

“The Kurds will now be somewhat loathe to go back to fighting, Ash said. “This is still the best chance they have of a lasting agreement.”

Yields Fall

The yield on two-year notes fell seven basis points, or 0.07 percentage point, to 8.77 percent at 3:01 p.m. in Istanbul. That pared an increase since the yield fell to a record low on May 17 to 398 basis points as demonstrations spread across Turkey and speculation grew the Federal Reserve will scale back stimulus measures that fueled a rally in emerging-market assets.

The lira fell 0.4 percent to 1.9328 per dollar. The currency has slumped 7.2 percent in the past three months, the most after South Africa’s rand among emerging-market currencies in Europe, the Middle East and Africa.

Default swaps on Turkey were little changed at 205 basis points. The contracts, which increase as perceptions of creditworthiness deteriorate, pay the buyer face value in exchange for the underlying securities should a government or company fail to adhere to its debt agreements.

“If there is a positive outcome to the peace talks, then Turkish assets will see significant revaluation,” Sozer said. “But this won’t happen overnight. It will take years.”

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