Turkish Markets Plunge After Moody's Cuts Country's Rating to Junk

  • Stocks post biggest drop globally, lira heads for two-week low
  • Moody’s downgraded the country’s credit score one level to Ba1

Lira Falls After Turkey Credit Downgrade

Turkish assets plummeted the most since an attempted coup in July and credit risk climbed after Moody’s Investors Service cut the country’s sovereign rating to junk.

The currency was headed for the the lowest level in two weeks as of 4:23 p.m. in Istanbul, the Borsa Istanbul 100 Index posted the steepest decline among about 90 gauges tracked by Bloomberg globally, and the nation’s dollar debt due 2026 sank the most since July. Moody’s lowered Turkey’s sovereign rating one level to Ba1 late Friday, the highest non-investment grade, citing rising risks due to its external financing needs and slowing economic growth.

The following are some of the biggest movers in Turkey’s markets on Monday:

  • The Borsa Istanbul Banks Sector Index sank 4.1 percent, the most since July 21
  • All but four of the 100 companies on Turkey’s benchmark stock gauge fell
  • The yield on Turkey’s 10-year debt rose 28 basis points, the most among emerging peers
  • Five-year credit default swaps rose 15 basis points

The cut is Turkey’s second since a failed coup in July threatened to destabilize national security. Many of the world’s biggest funds require investment-grade ratings from two of the three major ratings companies -- Fitch Ratings, Moody’s and S&P Global Inc. -- to consider an asset for investment. The downgrade could trigger a $3 billion fire sale of Turkish bonds, Citigroup Inc. said, while JPMorgan Chase & Co. said in August that forced selling could reach $8.7 billion. Turkey relies on capital inflows to finance one of the widest current-account deficits among the Group of 20 countries.

The decline in Turkey’s assets will “be a slow burn,” said Viktor Szabo, a portfolio manager at Aberdeen Asset Management in London who owns some of the country’s bonds and is betting against the currency. The rating cut hasn’t made Turkish “credit blow up, but it will put it on a more risky path,” he said.

The cost of insuring the nation’s debt for five years climbed to 263 basis points, CMA prices show.

Bond Auction

Some investors remained undeterred amid the sell-off. A government auction of 10-year lira bonds attracted the strongest demand in almost two years. The bid-to-cover ratio jumped to 3.56, the highest since November 2014, data compiled by Bloomberg show.

“Turkish bonds had already underperformed peers on downgrade expectations. Given the favorable global liquidity conditions and hunt for yield, it’s not easy to ignore such high yields,” Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul, said by e-mail.

Citigroup said the nation’s banks and some companies could also be downgraded by the agency though selling pressure may be limited because many investors are already underweight in the country, New-York based credit strategist Eric Ollom, wrote in an e-mailed note.

Failed Coup

Moody’s placed the rating on review for downgrade three days after a faction of Turkey’s military tried to overthrow the government on July 15, while S&P Global Inc. downgraded the country immediately following the failed coup. A junk rating at Moody’s leaves Fitch as the only company to maintain an investment grade for Turkey.

For a video of Turkey’s president discussing downgrades of the nation’s credit rating, click here.

The lira fell 0.4 percent against the dollar to 2.9797. The Borsa Istanbul 100 Index slumped 4.2 percent, the most since July 21, led by Akbank TAS and Turkiye Garanti Bankasi AS, both of which retreated almost 6 percent. The yield on the nation’s $1.5 billion debt due April 2026 rose 21 basis points to 4.49 percent, and the yield on the government’s 10-year local currency bonds climbed the most in more than two months to 9.80 percent.

“Many credit investors were waiting on the sidelines for a rating downgrade to create better value to buy, and this should act as a backstop,” Timothy Ash, a credit strategist at Nomura International Plc in London, said by e-mail on Saturday.

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