Thursday 09, August 2018 by Bloomberg

Turkish credit risk blow-out shows damage caused by lira's slide

 

The longer Turkish policy makers wait to stem the lira’s precipitous slide, the bigger the toll on the already fragile economy.

The cost of insuring the nation’s debt against default climbed to a nine-year high as an almost 30 per cent plunge in the exchange rate in 2018 threatens the finances of local firms that have gorged on foreign-currency loans. Turkish companies have foreign-exchange liabilities equal to about a third of the country’s gross domestic product, posing a serious threat to banks if the currency depreciation isn’t contained.

While investors focus Wednesday on Turkey-US talks in Washington for any signs of an easing of diplomatic tensions that added to the lira’s woes, there’s a growing sense that the root of the economy’s ills runs deeper. With double-digit inflation and a current-account deficit seen at 6.4 per cent of output this year, investors say the currency may continue to slide unless policy makers commit to tighter monetary and fiscal policy.

“Turkish policy makers have gone missing in action. Where are they? They haven’t said anything,” said David Riley, the head of credit strategy at BlueBay Asset management in London. “The market is wanting and demanding higher rates and if they don’t have higher rates sooner rather than later then I think they’re going to be forced either into something like capital controls or” the International Monetary Fund, he said.

Turkey’s five-year credit default swaps climbed seven basis points to 355 as of 12:47 p.m. in Istanbul, the highest level since April 2009. The nation’s contracts are the only ones across emerging markets to have widened this quarter. The lira weakened 1.3 per cent Wednesday, slipping toward a record low of 5.4222 per dollar reached Monday.

“The delay they’ve had so far means rates are going to have to go higher and they’re going to have a harder landing than they otherwise would,” Riley said.

 

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