Turkey $9bn bond rout signalled by swaps after botched coup

Bloomberg

The thwarted coup attempt in Turkey is leaving derivatives traders with little doubt the country’s three-year sojourn in investment grade is coming to an end, potentially triggering a fire sale of almost $9 billion of bonds.
In the three trading days since President Recep Tayyip Erdogan survived a bid by a faction of the military to depose him, the country’s five-year credit-default swaps have soared above junk-rated Russia and Brazil while the lira tumbled more than any other currency in the world to record lows. The credit score implied by the swaps contracts is four steps below investment grade, according to Moody’s Analytics, one level lower than before the crisis erupted on July 15.
Moody’s said this week it’s reviewing Turkey for a possible downgrade of the Baa3 investment-grade status it awarded the country in May 2013, in light of the attempted coup. S&P Global Ratings cut Turkey one level to BB on Wednesday, putting it two steps into junk territory.
A second speculative grade score from Moody’s risks prompting funds that can only own highly ranked debt to offload the $8.7 billion JPMorgan Chase & Co. estimates they hold in the country’s bonds.

Rising Yields
Declines for Turkish local-currency 10-year bonds have driven up yields by 112 basis points to 10.2 percent since Friday, wiping out the previous seven weeks of gains. The cost of insuring the country’s debt against default has had its biggest four-day increase since June 2013, bringing the credit-default swaps to 296 basis points.
The lira weakened to as low as 3.0973 against the dollar on Wednesday after the government declared a state of emergency and S&P cited concern over the deteriorating political environment in its decision to cut Turkey’s debt grade. S&P was the only ratings company to keep the country at speculative grade.
Brazil, cut to junk in February by Moody’s, has seen credit risk recede this year amid moves to impeach the country’s president. The credit-default swaps fell to 287 basis points on Thursday from as high as 533 in September. Russian contracts, which exceeded 600 in January 2015 in the aftermath of international sanctions and a wilting oil market, have dropped by more than half.
Insight Investment is currently underweight in Turkey because valuations were already expensive before the current crisis erupted.

Smaller Deficit
While Turkish economic growth is forecast to slow this year, the country has narrowed its current-account deficit since 2013, as falling oil prices reduced its energy-import bill. Turkey’s debt burden as a proportion of economic output more than halved in the decade to 2015.
This improvement means Turkey may still avoid a downgrade, according to Tim Ash, a strategist at Nomura International Plc in London.
Still, the political turmoil in the country has shattered optimism over the short-term prospects for Turkish assets. The lira will probably fall to 3.2888 per dollar within three months because”political risk has returned to Turkey with a vengeance,” Societe Generale SA said. Turkey will impose a three-month state of emergency as the government pursues those responsible for the failed coup, Erdogan said on Wednesday.

Turkish assets extend selloff after S&P cut, emergency

Bloomberg

Turkish stocks sank with bonds on concern other agencies may follow S&P Global Ratings and downgrade the nation’s debt after the government imposed a three-month state of emergency.
The Borsa Istanbul 100 Index fell 2.2 percent as of 9:54 a.m. in Istanbul, putting the index on track for its worst week since November 2008. The exchange’s banking index also sank, wiping out this year’s gains. The yield on the nation’s 10-year local currency government bonds jumped for a fourth day after the failed coup, lifting the yield to the highest level in two months. While the decision to declare a state of emergency wasn’t a surprise, “a risk of capital flight remains unless the measures adopted during the state of emergency are revealed clearly” Ozlem Derici, an economist at Deniz Invest in Istanbul, wrote in a research note.