Bloomberg News

Erdogan Proving Right as Debt Ratings Go Unheeded: Turkey Credit

June 27, 2012

Prime Minister Recep Tayyip Erdogan says Turkey deserves to be rated investment grade. Prices of credit-default swaps and dollar bonds show investors agree that debt-rating companies’ rankings for the country are wrong.

The cost of insuring Turkey’s debt has dropped below 15 nations ranked investment grade by Fitch Ratings and was two basis points above Russia, which is rated three steps higher, according to data compiled by Bloomberg. The extra yield on Turkey’s dollar bonds over U.S. Treasuries has fallen to 312 basis points, less than the spread of 556 for investment-grade Croatia, 470 for Romania and 358 for Kazakhstan, JPMorgan Chase & Co. indexes show.

Investors are cutting Turkey’s risk premium after the country pared its current-account deficit while targeting 4 percent economic growth this year, quadruple Germany’s forecast. Turkey’s upgrade by Moody’s Investors Service last week to one level short of investment status prompted Economy Minister Zafer Caglayan to say the ranking on a par with Portugal “wasn’t enough.” Erdogan said in September that “Turkey has long deserved an upgrade” and on May 5 that Standard & Poor’s cut of the country’s outlook didn’t reflect economic reality.

“Turkey has always been underrated and it’s still underrated,” Olgay Buyukkayali, a London-based strategist for emerging markets at Nomura International Plc in London, said in a telephone interview yesterday. “The true risk premium is credit default swaps and sovereign bond spreads that have been diverging from ratings consistently, with markets being much stronger on Turkey than the rating implied. It is only a matter of time until Turkey is upgraded.”

Bonds Rally

Yields on two-year lira bonds have dropped 237 basis points this year, the second-biggest decline in major emerging markets behind Brazil, as the trade gap fell, inflation slowed, growth moderated and Turkey’s currency recovered from last year’s 18 percent decline. Yields on 10-year lira debt have tumbled 124 basis points to 8.67 percent, still the highest among 15 major emerging markets tracked by Bloomberg.

Speculation that an upgrade from one of the ratings companies was imminent helped buoy bonds yesterday, sending yields down as much as 20 basis points, the most since March, Murat Yardimci, head of trading at ING Bank in Istanbul, said in e-mailed comments yesterday.

Fitch, which rates Turkey one level below investment grade along with Moody’s, said two months ago that it may raise the rating. “If Turkey can attain a soft landing with growth returning towards trend, greater confidence in inflation back towards the target, and the current-account deficit narrowing to a more sustainable rate, then that could lead us to upgrade the country,” Ed Parker, an analyst Fitch, said in an interview from London on April 26.

Inflation Slows

Inflation fell to 8.3 percent in May from a 3 1/2-year high of 11.1 percent in April, and the current-account gap has narrowed in each of the past six months, declining to $5 billion in April from $7.9 billion in the month a year ago. The 12-month rolling deficit fell to $69.2 billion from a record $77 billion in October.

Turkey is “decelerating toward a soft landing,” the International Monetary Fund said in a statement June 8. The economy grew 8.5 percent in 2011, the third-fastest pace in the world behind China and Argentina, and 9.2 percent in 2010, according to the state statistics agency.

Fitch’s Parker declined to comment yesterday. Zeynep Holmes, S&P’s chief of its Istanbul office, did not respond to an e-mail and telephone calls to her office and mobile phone. Sarah Carlson, a Moody’s analyst, wasn’t reachable for comment via calls to her office and the company’s press relations agency.

Syrian Attack

Syria’s destruction of a Turkish warplane over the Mediterranean on June 22 sent bonds and the lira falling and credit-default swaps up 12 basis points on June 25. Prices recovered after Erdogan said the country would deal with the issue via the North Atlantic Treaty Organization and by pursuing its rights under international law.

The yield on Turkey’s euro-denominated bonds due in 2020 was unchanged at 4.61 percent yesterday, within four basis points of the lowest since 2010. That’s a yield discount of 215 basis points to similar-maturity Spanish debt, 149 basis points to Italian debt and 460 basis points to Portuguese debt. It’s 136 basis points above Israel, which is rated AAA, the top investment grade, at Fitch.

“It is difficult to understand why Turkey is still sub- investment grade,” given that it’s one of the best fiscal stories in western Europe and emerging Europe, the Middle East and Africa, Simon Quijano-Evans, the head of emerging-market research for Europe, the Middle East and Africa at ING Groep NV in London, said in e-mailed comments yesterday.

Debt Levels

Turkey has a lower ratio of public debt to gross domestic product than 21 of 27 members of the European Union and a lower budget deficit to GDP ratio than 23 of them, Caglayan, Turkey’s economy minister, said in a statement on June 20. “The credit rating Turkey deserves is investment grade.”

Lutz Roehmeyer, who helps oversee the equivalent of about $19 billion in assets at Landesbank Berlin (BEB2) Investment in Berlin, said he’s among the minority that view the pricing Turkey’s assets is wrong, not its rating.

“Everybody thinks Turkey is invulnerable and Turkish authorities do everything right -- I doubt that,” Roehmeyer said in response to e-mailed questions yesterday. “Lending is out of control, same with the current account, and because the current-account deficit is too high, Turkey needs 24 hours-a-day access to capital markets in foreign currency. There will be a time when this will not be available.”

Yields Drop

Turkey’s benchmark yields dropped 15 basis points to 8.65 percent at 4:55 p.m. yesterday, the lowest in more than eight months. The lira weakened 0.3 percent to 1.8126 per dollar, paring its gains this year to 4.3 percent. Default swaps fell three basis points to 250, according to data compiled by Bloomberg. Credit default swaps would pay the buyer face value should a borrower fail to meet its repayment obligations.

Central bank Governor Erdem Basci lowered rates to a record low of 5.75 percent in August, setting off a lending boom with growth in loans hovering around 40 percent annually until October. Basci then switched to a dual-rate policy allowing him to adjust rates between the benchmark and a higher rate of 12.5 percent. The weighted average rate of central bank funding to banks was 8.62 percent yesterday, according to Bloomberg data.

Market Reaction

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

Since Moody’s downgraded 15 of the world’s biggest banks on June 21, every measure of risk in the credit markets shows that they enjoyed greater confidence among investors than before Moody’s said the downgrades reflected a deteriorating outlook.

“The link between the markets’ read of credit risk through CDS and the agencies’ credit ratings started to break down recently, especially with the European crisis,” Buyukkayali at Nomura said. “The ratings agencies have their own views, but it’s not really that relevant anymore, and they find themselves in this hard position where markets are actually showing completely different phenomena.”

Turkey’s success in cooling down its economy, good fiscal dynamics and supportive market pricing mean “the ratings agencies will have to move,” he said.

To contact the reporter on this story: Benjamin Harvey in Istanbul at

To contact the editor responsible for this story: Gavin Serkin at

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