Riots in Turkey Drive Bond Risk Higher

The continuing clashes in Turkey between riot police and protestors who oppose prime minister Recep Tayyip Erdogan’s policies could drive investor perceptions of the country’s credit risk above those of Russia for the first time in seven months, according to Bloomberg.

The business and financial markets news service reports that the cost to protect against losses in Turkish debt using credit default swaps (CDSs) has risen 41 basis points since 31 May, when anti-government demonstrations erupted. It currently stands at 172, narrowing the gap with higher-rated Russia to 10 basis points from 25 at the end of last month.

Bloomberg reports that the continuing unrest threatens to drive away investors, who had been lured to Turkey by
higher yields, falling debt levels and credit-rating upgrades
. The yield on the nation’s January 2030 dollar bond has climbed 50 basis points since the protests began, compared with a 26 basis-point increase for Russia.

Erdogan has warned demonstrators and also promised to ‘choke’ financial speculators, whom he attacked for seeking to profit from the unrest. At least three people have died in more than a week of clashes as protesters accuse the prime minister of increasingly autocratic behaviour since police cracked down on a rally in Istanbul’s Taksim Square.

The unrest has created volatility in financial markets, with both the Istanbul stock exchange – now known as Borsa Istanbul – and the Turkish lira (TL) suffering declines. The Central Bank of the Republic of Turkey (CBRT) declared its readiness to intervene to support the lira.

The CBRT said it would tighten monetary policy in the short term, principally through reducing lending, to address what it called “excessive volatility … in the foreign exchange market due to the international and domestic developments during the last month.”

Turkey’s gross domestic product for the first quarter of 2013 rose 3% year on year to exceed expectations, while the country recorded a current account deficit for April of more than US$8bn.

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