Turkey’s Credit Risk Rises
Turkey’s Credit Risk Rises Most in 10 Months on Military Threat
By Hamish Risk and Agnes Lovasz
April 30 (Bloomberg) — The risk of owning Turkey’s bonds rose the most in 10 months after the army threatened to intervene should an Islamist presidential candidate be elected, according to traders of credit-default swaps.
Contracts based on $10 million dollars of Turkish debt jumped $18,000 to $166,000, according to Lehman Brothers Holdings Inc., as traders priced in a higher risk of owning the securities.
Turkey’s military, which has forced four administrations out of office since 1960, threatens to scupper the country’s negotiations to join the European Union. EU Enlargement Commissioner Olli Rehn on April 28 said the army’s reaction to the vote was a “clear test case” of whether it could respect the 27-nation bloc’s “democratic values.”
“The market fears that this could impact Turkey’s progression into the EU,” said Kaushik Rudra, an emerging markets credit strategist at Lehman Brothers in London. “There is potential for more market stress if the government holds its ground, and the army decides to flex its muscle.”
Credit-default swaps are used to speculate on the ability of countries or companies to repay debt. The army’s threat also triggered a sell off in the government bond market, Europe’s best performer so far this year.
The yield investors demand to buy benchmark Turkish bonds maturing in February 2009 rose 86 basis points to 19.25 percent, according to the Istanbul Stock Exchange. A basis point is 0.01 percentage point.
Economic Boost
Turkey’s bonds had been gaining on optimism that eventual EU membership would boost the nation’s $400 billion economy and encourage investment from overseas. The securities have returned 9.4 percent since the start of January, more than double the average of 3.9 percent for emerging markets, according to JPMorgan Chase & Co. indexes.
“The military’s involvement in politics undermines Turkey’s case for EU membership,” Serhan Cevik, an emerging markets economist at Morgan Stanley in London, wrote in a note to clients today. “Foreign as well domestic investors prefer to put their money in a country where the rule of law is unquestionable.”
A slump in the value of Turkey’s currency last June prompted concerns over inflation and the cost credit-default swaps soared. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country fail to keep to its debt agreements.
Protest Rally
Hundreds of thousands of people rallied in Istanbul yesterday to protest the candidacy of Foreign Minister Abdullah Gul, who was a member of the pro-Islamic Welfare Party ousted from government by the army in 1997 and subsequently banned. Military leaders accused Prime Minister Recep Tayyip Erdogan’s administration of using the presidential election to undermine the country’s secular tradition.
Meanwhile, the risk of owning European corporate bonds was unchanged today. The cost of a credit-default swap based on a 10 million-euro ($13 million) contract on the iTraxx Crossover Series 7 Index, which includes 50 companies with investment- grade and non-investment grade ratings, was at 204,500 euros at 5 p.m. in London, according to JPMorgan Chase & Co.
Credit-default swaps are the fastest growing part of the $370 trillion market for derivatives, financial obligations whose value is derived from the price of underlying assets such as bonds, equities, commodities and currencies.
To contact the reporters on this story: Hamish Risk in London hrisk@bloomberg.net .
Last Updated: April 30, 2007 12:25 EDT
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