Photographer: Ismail Ferdous/Bloomberg

Turkey Stocks and Bonds Extend Retreat After S&P’s Rating Cut

  • Stock index on track for worst week since November 2008
  • 10-year bond yield rises to highest level in two months

Turkish stocks and bonds tumbled on concern further credit downgrades will spark an exodus of capital after President Recep Tayyip Erdogan imposed a three-month state of emergency on the nation following the failed weekend coup.

The Borsa Istanbul 100 Index declined 4.4 percent Thursday, reversing this year’s gains and is headed for its worst week since 2008. The nation’s 10-year local currency government bonds fell for a fifth day. The lira gained 0.5 percent after it weakened to an all-time low yesterday.

Here are some of the market moves that stood out on Thursday:

  • The Borsa Istanbul 100 Index, which fell as much as 4.5 percent today, is about 4 percent away from a bear market
  • Turkey’s banking stocks retreated as much as 4.9 percent
  • The yield on the country’s 10-year debt rose as much as 26 basis points

Erdogan’s government declared a state of emergency on Wednesday as it pursues those accused of being behind the attempted coup. Turkey has arrested thousands of army officers, judges and prosecutors, and embarked on a purge of other institutions such as universities this week. S&P Global Ratings cut Turkey’s credit to BB, two steps below investment grade, with a negative outlook, to reflect the further fragmentation of the political landscape.

“A risk of capital flight remains unless the measures adopted during the state of emergency are revealed clearly,” Ozlem Derici, an economist at Deniz Invest in Istanbul, wrote in a research note. “Otherwise, we may see rate cuts from Moody’s and Fitch as well.”

The S&P downgrade came days after Moody’s Investors Service said it would put the nation’s credit rating on review for a possible cut.

The premium investors demand to hold Turkish bonds over similar-maturity U.S. Treasuries surged this week to 338 basis points, according to JPMorgan Chase & Co. indexes. That compares with an average of 375 basis points for emerging-market debt.

Market Economy

Turkey’s 4.25 percent dollar bond due 2026 snapped a seven-day losing streak as the yield fell 2 basis points to 4.71 as of 6:14 p.m. local time. The cost of insuring against default Turkish debt fell 7 basis points to 281 after rising every day since the coup.

“We think that Turkey will remain pragmatic when it comes to the economy,” Trieu Pham, a strategist at Mitsubishi UFG Financial Group Inc in London, said in e-mailed report.

Deputy Prime Minister Mehmet Simsek tried to reassure investors by saying the state of emergency won’t affect ordinary people and businesses. Erdogan has blamed the foiled military intervention on supporters of U.S.-based religious leader Fethullah Gulen.

Turkey will emerge with a “better functioning market economy and enhanced investment climate,” Simsek said on Twitter. He later added in a television interview with NTV that the government won’t use all of its power under emergency rule, which allows officials to issue decrees with the force of law and suspend rights, according to the constitution.

Still, “there will probably be a growing number of our clients who think Turkey is not an appropriate investment destination,” Akihiko Tanabe, the general manager of the global fixed-income investment department at Meiji Yasuda Asset Management in Tokyo, said in a July 20 interview.

Akbank TAS’s 3.8 percent loss was the biggest contributor to the Borsa 100’s drop. The Borsa Istanbul Banks Sector Index retreated 4.7 percent to the lowest level since January 21. The yield on the country’s 10-year, local-currency notes increased to 10.25 percent, the highest level in two months.

Arcelik AS, Turkey’s biggest home appliance maker’s 350 million euros bond due September 2021 fell 0.6 cent on the euro to 97.4 cents, according to data compiled by Bloomberg.

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