July 18, 2016 / 5:25 PM / 3 years ago

Coup turmoil endangers Turkey's investment-grade rating

LONDON, July 18 (Reuters) - Turkey’s investment-grade credit rating is hanging by a thread after last week’s attempted coup and any further deterioration would force some conservative investors to dump billions of dollars worth of Turkish assets.

Brazil and Russia showed what the loss of investment-grade status can do last year: when they were cut to speculative or “junk” grade, their bonds, stock markets and currencies plunged.

Turkey now faces a similar threat. Standard and Poor’s already rates the country BB+, its highest junk grade, but it remains on the last rung of the investment grade ladder at Moody’s and Fitch, which rate Turkey Baa3 and BBB- respectively.

A cut by either ratings firm would take Turkey’s average sovereign rating to junk for the first time in three years, while its banks, which borrow heavily on international bond and loan markets, would also see their ratings lowered.

“A downgrade looks more likely than it did last week,” said Kieran Curtis, a portfolio manager at Standard Life Investments.

“The question is, if Turkey gets downgraded as a result of this instability does that affect the amount of financing available, and if so how does it affect the growth model?”

Any rating decisions could depend on the government’s policy response to the turmoil surrounding Friday’s failed coup. Deputy Prime Minister Mehmet Simsek said the government had decided on “all necessary measures” while the central bank pledged to provide unlimited liquidity to banks.

Moody’s is scheduled to review Turkey’s rating on August 5 and said on Monday it would “monitor the situation.”

Fitch’s next official review date is August 19. It said in a statement on Monday that the coup and the government’s subsequent crackdown had “the capacity to weaken sovereign creditworthiness”.

“The political fallout could refocus attention on Turkey’s large external financing requirement,” Fitch said, referring to the country’s $30 billion plus current account deficit.

S&P said on Monday it would also assess the implication of events in the coming days.


Some in the financial markets already seem to be pricing in a downgrade. A model used by S&P’s research unit calculates that Turkish credit default swap (CDS) prices are now trading as a BB credit, one notch below the official S&P rating on Turkey, and two notches below the Moody’s and Fitch ratings.

Turkish five-year CDS rose 24 basis points to 249 bps on Monday, data from Markit showed. That is higher than junk-rated Russia but less than South Africa, which is widely expected to lose its investment-grade rating in coming months.

Turkey’s fundamentals were already mixed before the coup attempt, with a model run by ICBC Standard Bank showing that its current account deficit and inflation were worse than other BBB- rated countries, while economic growth was stronger.

Emerging market money managers often have leeway to invest in lower-rated credits, and Marco Ruijer of NN Investment Partners said he was thinking of buying more Turkish debt after prices fell on Monday.

Rob Drijkoningen, head of emerging debt at Neuberger Bermann, meanwhile noted that Turkey’s local currency debt is rated investment-grade by all three major agencies, meaning that one downgrade would not affect the average score.

Local debt could even benefit in the short-term should the central bank cut interest rates on Tuesday more aggressively than forecast, after reducing rates at every meeting in the past four months. Whether to buy will pose a dilemma for international investors who are seeing returns crushed by low or sub-zero bond yields in the West and Japan.

On Monday, Turkish 10-year yields spiked more than 60 basis points to three-week highs of around 9.5 percent.

Guido Chamorro, a portfolio manager at Pictet, said a 25-50 basis point cut was “a base-case scenario unless the central bank wants to send a louder message.”

“This could potentially be positive for local rates,” he added. (Additional reporting by Karin Strohecker; Editing by Catherine Evans)

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