Turkey still struggling with investment grade

Bloomberg News
Updated 4/30/2012 4:40 PM

ISTANBUL -- The credit market is already endorsing Turkey as investment grade even as ratings companies say the country's debt is junk.

The cost to insure against a default by Turkey has dropped 56 basis points below the average for investment-grade countries including emerging-market peers Russia, Poland and South Africa, according to data compiled by Bloomberg. While Turkey's benchmark two-year yields at 9.32 percent are the highest in emerging markets, 10-year lira bonds are yielding 9.04 percent, higher than 15 emerging markets, and 163 basis points less than local Brazilian debt that is rated three steps higher by Moody's Investors Service and Standard & Poor's.


Turkish securities have rallied as Prime Minister Recep Tayyip Erdogan's government cut the budget deficit to 1.4 percent of gross domestic product and central bank Governor Erdem Basci raised interest rates to pare the current-account deficit and inflation from record highs. While "solid" finances give Turkey investment-grade potential, the current- account gap and inflation must drop more for Fitch Ratings to consider an upgrade, Ed Parker, head of Europe, Middle East and Africa sovereign ratings, said in an April 26 interview from London.

"Imbalances, inflation, twin deficits and other problems always accompany the strong growth stories, and rating agencies and skeptical-minded economists have not much else to do but focus on these details," Tatha Ghose, a senior emerging-market economist at Commerzbank AG in London, said in e-mailed comments. "Five years later, they realize they missed the big picture. The Turkish situation will only get better."

Turkey's economy, the eighth largest in Europe at $772 billion, will grow by at least 4 percent this year, according to government forecasts. It expanded 8.5 percent last year, the fastest pace among major economies after China and Argentina.

The lira, the world's worst-performing currency last year with an 18 percent decline against the dollar, has appreciated 7.5 percent this year. It gained 2.1 percent over the past week to 1.7583 per dollar at 5:00 p.m. in Istanbul, trading 0.2 percent higher today.

Credit-default swaps on Turkey have dropped 53 basis points this year to 234, data compiled by Bloomberg show. The contracts cost 51 basis points less than the average for countries in central and eastern Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index and are below 12 of 51 countries rated investment grade. The swaps were unchanged today after falling for four days.

Default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

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