Turkey’s credit rating cut, as worries of war spillover grow

LONDON (Reuters) – Credit agency Fitch Ratings yesterday cut its ratings for Turkey, catching up with market sentiment in a country that has seen its benchmark debt fall nearly 20 percent this month. Markets have grown unhappy with Turkey due to its slow implementation of the country’s $16 billion International Monetary Fund program since the Justice and Development Party (AK) took over in November. But fund managers and traders refrained from selling Turkish assets until last week, believing it might secure a $30 billion grant and loan package from the US in exchange for granting troops access to bases in southern Turkey ahead of the war in Iraq. However, last week war broke out and Turkey said it would only allow the US access to its air space. Investors began fearing Turkey could suffer the full economic spillover of war, without any financial aid. «With the larger US aid program no longer on the table, Turkish markets (have been) in free fall over the past week,» said Tim Ash, emerging debt strategist at Bear Stearns in London. Fitch yesterday cut Turkey’s long-term ratings to B- with a negative outlook, citing worries about 2003 funding and volatile domestic debt valuations. The ratings are at the lower end of speculative grade, a ratings range which already restricts Turkey to a small pool of potential investors. The agency confirmed the short term rating of B. «The average maturity of the domestic debt stock is very short, so changes in market sentiment feed through very quickly into additional costs for the government,» said the agency. «Fitch believes that the authorities could face a larger-than-expected funding burden for 2003.» Turkey has $95 billion in domestic debt, and war will raise financing costs while scaring off tourists, who provide vital foreign exchange earnings. «Local interest rates have pushed back over 70 percent this week, which puts real interest rates at over 40 percent. Just for debt ratios to stand still they need 5 percent growth, 12 percent average real interest rates and a primary surplus of 6.5 percent or so,» said Bear Stearns’s Ash. Bonds rising, for now Turkish assets showed little initial reaction to the Fitch move because, late on Monday, US President George W. Bush sent a measure to Congress which included $1 billion in aid for the country. In addition, Turkey is already rated B- by Standard and Poor’s. Moody’s Investors Service regard Turkey as a B1 quality issuer, two notches higher than its rivals. «For Fitch to lower the long-term lira and forex outlook is not a surprise development. It was to be expected in the current situation,» said Ibrahim Haseski, deputy head of asset management at Garanti Investment in Istanbul. Turkish assets have already fallen for the last four sessions. At 1420 GMT Turkey’s benchmark 2030 dollar bond was up 3.125 points on the session at 84.625 percent of face value. «On another day it would have had more relevance to market performance… but it is not as though they are a market leader in terms of where they are pitching the rating,» said Alex Garrard, emerging debt strategist at UBS Warburg. «Instead, the focus is on the modest expression of support Turkey received from the US.» In coming days, «the focus will be on getting the letter of intent returned to the International Monetary Fund, and approving the 2003 budget which may take place this weekend,» said Garrard. On Monday the AK promised to cut 2003 planned budget spending by $2.3 billion to convince the IMF to release a $1.6 loan tranche.

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