Turkey’s debt risk near the epidemic peak calls into question the lira’s plan – News Couple
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Turkey’s debt risk near the epidemic peak calls into question the lira’s plan


(Bloomberg) – The historic appreciation of the Turkish lira this week has not put investors at ease in the country’s stock and bond markets.

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Five-year credit default swaps, a measure of Turkey’s debt risk, remain near a 16-month high, even after falling for two days after the government announced steps to support the currency. Investors are paying more to insure themselves against a default by Turkey than they are paying Iraq, whose debt has been rated two steps lower by both Moody’s Investors Service and Standard & Poor’s Global.

The country’s benchmark stock index, which closed in a bear market and completed its biggest drop in four days in more than two decades, is sending equally worrying signals. President Recep Tayyip Erdogan’s actions, which promised investors protection from currency fluctuations, are raising concern about the impact on the country’s financial situation.

How does Erdogan’s plan to stop the fall of the lira work?

“The plan is, in short, unsustainable,” said Lutz Roemer, chief investment officer at Berlin-based Capitulum Asset Management GmbH. “It stops only part of the capital flight from Turkish savers. There may still be people who do not trust the scheme and still prefer to keep the US dollar over the lira.”

saving lira

The moves Erdogan announced this week came as the lira slumped after 500 basis points in interest rate cuts by the central bank since September. The Turkish president has relied on policymakers to lower borrowing costs in an effort to attract investment and boost his waning popularity. But with inflation accelerating, it has left investor confidence in the central bank in tatters.

According to the plan, the Turkish Treasury will compensate the losses incurred by deposit holders in lira in the event that the currency depreciation exceeds bank interest rates. For example, if banks paid 15% on lira deposits for a year but the currency fell 20% against the dollar in the same period, the treasury — that is, taxpayers — would pay the deposit holders the difference.

It’s too little, too late for some debt investors. They have lost 7.8% on the country’s dollar-denominated sovereign debt this year, compared to 2.9% across emerging markets, the worst performance since 2013. Meanwhile, corporate debt holders lost 1.7%, the sixth largest globally, according to Bloomberg Indexes. . .

Erdogan’s move comes too late to save 2021 from Turkish debt

alcohol market

The Istanbul Stock Exchange 100 index fell for a fourth day on Wednesday and lost 21% during this period, the largest drop since July 2001. Trading was halted automatically for four consecutive days, with high margin trading levels and increased demand for collateral. This exacerbated the move.

The crash comes in part as Erdogan’s actions have sent the lira higher, removing the main catalyst behind the rally in Turkish stocks over the past three months – as local investors have used stocks as a hedge.

Meanwhile, the lira swung between losses and gains on Wednesday, trading up 0.4% at 12.4361 per dollar as of 10:15 a.m. in New York after rising nearly 30% in the past two days. While the currency remained near its strongest level in a month, it was also exposed to heavy volatility, with three-month volatility hitting a record high this week.

For Carlos de Sousa, money manager at Vontobel Asset Management, Erdogan’s plan may provide another stimulus for gains in consumer prices. Inflation accelerated last month to 21.3%, more than four times the government’s 5% target. The central bank’s benchmark interest rate is 14%.

“This policy will accelerate the transition from depreciation to inflation and lead to a chronically higher inflation equilibrium,” de Sousa said. This, in turn, “will require further depreciation of the lira in the medium term.”

(Updates with stock market closing, lira prices under “Bear Market” section.)

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