Global Investors Pre-emptively Rate Turkey Investment Grade

Posted on 01 July 2010

It seems that global investors are acting on the basis that the rating agencies will imminently upgrade Turkey‘s debt rating to investment grade. This belief comes from the fact that it currently costs as much to insure Turkish debt against default as it does to insure debt of Russia in so called credit default swaps.

Default swaps on Turkish bonds are currently being sold for 1.84% of the price of the bonds, while Russian swaps cost 1.845. This is compared to insurance on Spanish debt, which currently costs 2.65% of the value of the bond.

Russia has an investment grade BBB rating with Standard and Poor, and investment grade ratings with all the major agencies, while Turkey is 3 grades below with S&P at BB, two-levels below investment grade at Ba2 with Moody’s and 1 level below investment grade with Fitch rating at BB+. This is despite all credit agencies having recently upgraded Turkey‘s debt rating.

All three credit ratings agencies have said that the implementation of a new fiscal rule recently announced by the Turkish government will affect whether or not Turkey is upgraded. The new rule would force the government to target a budget deficit of 1 percent of economic output. The legislation, which aims to reduce the ratio of debt to gross domestic product to 15 percent in the long term from about 49 percent in 2009, will be discussed in the assembly in Ankara in the coming days.

Although the credit agencies do say that default swaps are not an accurate indicator of borrowing costs, and that Turkey’s chances of being upgraded to investment grade in the short-term are no better than 1 in 3, it does seem that investors feel the odds are better.

“The market is taking an opinion about Turkey that is more sanguine” than ratings companies, Bill O’Neill, chief investment officer for Europe, the Middle East and Africa at Bank of America Merrill Lynch’s wealth-management unit, said in an interview.

It is little wonder: the Turkish economy grew 6% on an annual basis in the final quarter of last year. After 3 quarters of contraction this was one of the strongest growth’s in the Euro area. But it is in Turkey’s first quarter growth that the biggest headlines were made; early forecasts were for a 1st quarter growth of 10%, which would have seen Turkey beaten only by China, but the latest forecasts are for a growth of 12%, which would beat China’s growth of 11.84%.

That is only part of the story though, while many European economies including the UK, Ireland, Spain and Portugal, are fighting third-world like budget deficits, Turkey reigned in its biggest budget surplus in almost 2 years in May as tax revenues soared.

All in all the Turkish economy is growing strongly and the government is showing every sign that it will treat economic growth with fiscal responsibility. So in the short term there is very little risk of defaults on Turkish state debts.

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