* Eurobond completes half of Turkey's 2014 borrowing
* Central bank sells $2 bln to prop up lira, bankers say
* Turkish political risk a growing concern
By Nick Tattersall and Nevzat Devranoglu
ISTANBUL, Jan 23 Turkey received a vote of
confidence in its underlying economic health on Thursday, with
foreign investors lapping up a $2.5 billion eurobond issue even
as a corruption scandal swirled and the central bank intervened
to prop up the lira.
The graft investigation, one of the biggest threats to Prime
Minister Tayyip Erdogan's 11-year rule, has shaken Turkey in
recent weeks, helping send the lira into a tailspin and
heightening uncertainty ahead of elections this year.
Bankers said the central bank had sold around $2 billion in
its first direct intervention in the forex market for two years,
after the currency dropped to within a whisker of 2.3 to the
dollar, a new record low.
The central bank confirmed it had sold dollars in a direct
intervention but gave no further details.
The cost of insuring Turkish debt meanwhile rose to a new
18-month high, Markit data showed.
Erdogan has cast the corruption investigation as a plot to
undermine his government and Turkey's international standing,
and has responded by purging the police of thousands of officers
and seeking to tighten his grip on the courts.
Scuffles broke out in parliament ahead of a debate on
government plans for judicial reform, with a deputy leader of
the main opposition party taken to hospital, while media reports
said 167 more police officers were reassigned, most of them in
the western city of Bursa.
But bond investors looked beyond the immediate turmoil to
Turkey's strong underlying public finances, with the eurobond,
priced at 5.85 percent, four times oversubscribed. The country
has never defaulted on its foreign debt even in past economic
crises and its budget deficit and public debt as a proportion of
national output remain well below European Union criteria.
"Turkey had little problem selling its debt but was forced
to pay up," said Nicholas Spiro, head of Spiro Sovereign
Strategy in London.
"In the current environment, the higher the yield, the more
attractive the issue to yield-hungry investors - particularly if
it's a dollar-denominated one in a vulnerable emerging market
The eurobond was a boon for Erdogan as he battles to
maintain his record for strong economic management ahead of
local elections in March and a presidential race in August.
The issue completes half of Turkey's planned borrowing for
2014, easing pressure on its finances ahead of a likely
destabilising cut in the U.S. monetary stimulus which has
flooded emerging markets like Turkey with cheap cash.
Investors from the United States bought two thirds of the
10-year issue, Turkey's first outing on a foreign market since
the corruption scandal erupted with the detention of businessmen
close to the government and three ministers' sons on Dec. 17.
Deputy Prime Minister Ali Babacan, who has responsibility
for the economy, said the eurobond issue was a sign of
confidence in Turkey's long-term outlook.
It was priced at 299 basis points over U.S. treasuries,
almost double the spread it paid in a similar issue a year
earlier, but only 15 basis points over Turkey's current yield
"I think the Treasury is eager to get a big deal away to
prove that despite all the concern over domestic political
tensions, and the pressure on the lira, it is still able to tap
international capital markets," said Timothy Ash, head of
emerging markets research at Standard Bank.
Erdogan has overseen strong economic growth in Turkey since
coming to power in 2002, transforming its reputation after a
series of unstable coalition governments in the 1990s ran into
repeated balance of payments problems and economic crises.
But its politics are an increasing concern for investors.
Erdogan's reaction to the corruption probe, in particular
government efforts to tighten control over the naming of judges
and prosecutors, has drawn sharp criticism from the EU, which
Turkey has been seeking to join for decades.
"It is impossible for foreign capital to come to a country
which doesn't respect the supremacy of law, whose judicial
mechanism doesn't work according to EU norms, whose regulatory
institutions' independence is tarnished," said Muharrem Yilmaz,
head of the prominent TUSIAD business association.
Concern about creeping authoritarianism has also raised
questions about the independence of the central bank, which has
consistently avoided the outright rate hikes the market sees as
necessary to defend the lira, bowing to what many investors see
as pressure from Erdogan's government.
Erdogan and some of his ministers have repeatedly railed
against what they see as an "interest rate lobby" of speculators
seeking to push up rates at the expense of economic growth.
The bank again shied away from hiking rates at its latest
meeting this week, but announced what effectively amounted to a
rate increase by the back door, saying it would fund the
interbank market at 9 percent on "additional tightening" days,
when it cancels repo auctions and sells dollars at auction.