Turkey’s sovereign debt is now more expensive to insure than it was during a currency crisis in 2018, reflecting the financial stress the country is under as the coronavirus dramatically slows economic activity.
Investors are turning to credit default swaps (CDS) to trade in Turkish risk after successive interventions by the central bank and state-run banks to defend the lira distorted the value of the embattled currency.
The cost of Turkish five-year CDS, which insures investors against the government failing to repay its bonds coming due, increased by 2.8 percent to 616.84 basis points on Friday. It peaked at about 550 basis points at the height of the currency crisis. The seller of the swaps is making a charge based on the value of the buyer’s bond holdings annually in order to safeguard interest and capital on the investment.
While Turkey has never defaulted on its debts, the cost of the insurance has more than doubled from 238.29 basis points at the start of February, when better prospects for economic growth and financial stability in the country gave investors the confidence to buy Turkish bonds.
CDS is normally bought by bondholders when they fear the seller could default. Like several other emerging markets and so-called ‘frontier economies’ such as Sri Lanka, Honduras and Tunisia, Turkish bonds are rated as ‘junk’ by credit ratings agencies Moody’s, Standard & Poor’s and Fitch.
Fitch warned last month that Turkey’s high indebtedness – with around $170 billion in short-term private and public sector debt payments due this year – made it particularly vulnerable to global market fluctuations.
The cost of Turkey’s CDS has surged from 407.7 points on March 11, when the government announced the first case of the coronavirus. In comparison, Greek CDS stood at 173.3 basis points this week, Brazil 327.8 points, Russia 163.7 basis points, China 59.1 basis points and Germany 10.1 basis points.
Turkey has responded to the outbreak of the coronavirus by announcing a 100 billion-lira ($15-billion) rescue package to help businesses and consumers weather ensuing financial turmoil.
Many local economists and commentators say the measures, which total less than 2 percent of GDP, are insufficient because they fail to provide financial assistance to many Turkish households, including millions who are not officially employed but working.
The cash pledged by President Recep Tayyip Erdoğan is dwarfed by similar initiatives in Europe, which run into hundreds of billions of dollars and help protect workers against job losses and businesses from financial ruin.
Some investors now wonder how long the central bank can continue to defend the lira as prospects for the economy darken. Monetary policymakers have already used up tens of billions of dollars of foreign exchange reserves in support of the currency. The bank’s net forex reserves, when excluding dollars and euros borrowed from state-run banks through swaps, may total just a few billion dollars.
The lira fell by 1.4 percent to 6.71 per dollar late on Friday, plumbing the lowest levels seen since a currency crisis in the summer of 2018 sent it to a record low below 7.2 against the dollar.
Turkey’s financial problems are being compounded by a slump in tourism revenue. Income from tourism is a vital source of foreign currency for Turkey, but may be obliterated this year should lockdowns in Europe persist through the summer.
Turkey has to raise foreign currency and balance its books in order to finance a foreign trade deficit and to repay the tens of billions of dollars in government and privately owned international debt coming due over the next few months.
But cases of the coronavirus in Turkey are climbing steeply, resembling patterns seen in Italy and Spain only a few weeks ago, threatening the country’s economic health.
Infections rose by 2,456 to 18,135 on Thursday as the authorities tested 18,757 people, bringing the total of tests to 125,566, Health Minister Fahrettin Koca said. Deaths increased by 79 to 356.
Turkish businessmen and opposition politicians are now saying that the government should consider a tighter lockdown to contain the virus’s spread. Currently, Erdoğan is asking Turks to stay at home voluntarily and says the economic wheels must keep turning, but has not ruled out further measures.
In Istanbul, city mayor Ekrem İmamoğlu says time is running out to contain the spread of the illness.
Cases in Istanbul, where banks and manufacturers provide the engine for Turkey’s $754-billion economy, represent almost two-thirds of the national total. Late on Thursday, İmamoğlu repeated a call for Erdoğan to announce a full lockdown of the city’s population of 15.5 million.