Bloomberg News

Turkey Bonds, Lira May Sink on Greece, Buy Swaps, RBS Says

June 16, 2011

(Updates with Greek default swaps in sixth paragraph.)

June 16 (Bloomberg) -- Investors should sell lira and Turkish debt and buy the country’s credit-default swaps on concern Europe’s debt crisis will spread and the country will struggle to contain its current-account deficit, according to Royal Bank of Scotland Group Plc.

The lira fell to the weakest level against the dollar in more than three months, while bond yields and default risk rose, as Greek Prime Minister George Papandreou sought a vote of confidence amid protests against budget cuts. Turkey’s current- account deficit widened to $7.7 billion in April, the second highest since records began in 1984, even after the central bank raised reserve requirements for banks to curb loan growth.

“Given that markets are looking for vulnerabilities, it is probably not opportune for Turkey to be running a record current-account deficit,” Tim Ash, chief economist for emerging markets at RBS in London, wrote in an e-mailed report today. The central bank and government need to indicate their willingness to tighten monetary and fiscal policy, he said.

The lira declined 0.2 percent to 1.6116 per dollar at 5:35 p.m. in Istanbul, the weakest since March 2 on a closing basis. Two-year benchmark bond yields rose 14 basis points, the most in four weeks, to 9.09 percent. The cost of protecting against default by Turkey with credit swaps increased five basis points to 176.

“There’s going to be more volatility,” Ash said by phone. The lira will probably weaken to 1.7 per dollar before the year- end and “it could happen much earlier if the current risk-off environment sustains over the Greek problems,” he said.

Credit-default swaps on Greece rose to as high as 1,874 basis points, while those on Ireland climbed to 800 and Portugal reached 825, according to CMA prices. The Greek swaps imply a 79 percent chance of a default within five years.

Markets are looking at the possibility “of contagion spreading to other economies,” said Neil Mackinnon, an economist at VTB Capital in London and a former U.K. Treasury official.

--With assistance from James G. Neuger and Jonathan Stearns in Brussels. Editors: Stephen Kirkland, Gavin Serkin

To contact the reporter on this story: Benjamin Harvey in Ankara at bharvey11@bloomberg.net

To contact the editor responsible for this story: Mark Bentley at mbentley3@bloomberg.net


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