Page 32 - BNE_magazine_06_2019

32 I Cover story bne June 2019
TURKEY INSIGHT: Not weak at the knees yet? Credit default swaps just hit 520
Akin Nazli in Belgrade
Turkey’s 5-year credit default swaps (CDS) hit 520 bp on May 24, reaching the highest level on record since September. The 500-threshold was passed on May 23 and it’s clear international markets are currently pricing in
a Turkish default.
The all-time high 5-year CDS level posted for Turkey of 566 was registered last September 4, 10 days before the central bank hiked its main policy rate by 625bp in a belated response to the havoc wrought by the lira crisis.
With the cost of insuring exposure to its sovereign debt soaring, Turkey currently ranks at 4th place in the global league for a potential default. Venezuela, which has defaulted, is the leader by far with a 5-year CDS of more than 70,000. It is followed by Argentina at over 1,000 and Ukraine, which is in the 550s.
Pakistan, the country nearest to overtaking Turkey, has a 5-year CDS level of around 360.
The CDS figures indicate Turkey’s Quixotic President Recep Tayyip Erdogan has managed to plonk himself at an alarming crossroads once more.
Past experience suggests he will now prefer to fuel tensions in Turkey’s polarised society, with the Istanbul mayoral election revote ahead on June 23 presenting ample opportunity for distraction. After the re-voting is over, he might then employ another dazzling U-turn, once more becoming a ‘good kid’ for the markets.
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in the central bank’s policy making has seriously undermined creditability of
the regulator. The currency shock of last summer eventually brought a huge policy rate hike in an attempt to curb runaway inflation and has been inevitably followed by a deep recession. But as the summer starts it looks like Turkey is going to repeat all the mistakes of last year.
Textbook mishandling
Turkey’s lira crisis will be a boon to students for years to come as a textbook example of how not to run an economy. Quixotically Erdogan was leaning on the central bank to lower interest rates while the regulator was attempting to put the brakes on the collapse of the currency.
This policy is diametrically opposed to standard economic theory and led to concurrent double-digit inflation and recession at the same time. Now the government is facing the unpleasant conundrum that Buridan’s ass was forced to try and choose between: fight inflation but tolerating a far deeper recession,
or fight the recession but accept that hyperinflation will be unavoidable.
Turkey watchers have been calling for an IMF deal, but Ankara holds up its nose at the idea, which puts it at odds with the very domestic and international market players it needs to win over if the rot is to be reversed.
“#trilemma in action in Turkey. Slightly less liberal capital account, slightly more room to ease monetary policy,” noted Inan Demir of Nomura on May 21 in
a tweet.
According to the Reuters analysts, the government has four options right now: borrowing time with help from the capital markets, the IMF, capital controls or a policy rate hike.
Government’s borrowing costs have shot up but Turkey is nowhere near being locked out of the international capital markets yet, according to the news service. “With a relatively comfortable debt to GDP ratio – expected to climb to around 35% by year-end, which is lower than most heavyweight emerging market countries – it could look to secure some
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