Political instability causes worries over Turkish debt

ANKARA – Just when Turkey looked to have set its economy on the mend, a new bout of political uncertainty is weighing on markets and renewing concerns about a crisis – swollen debt load with hefty redemptions – looming next week. Markets have tumbled since Prime Minister Bulent Ecevit was admitted to hospital twice in May, sparking fears that his fractious coalition government could collapse in his absence. That could spark early elections that might undermine the country’s $16-billion IMF recovery pact. It is the old, familiar Turkish malady of politics confounding economic calculation. The treasury must repay 3,999 trillion lira ($2.6 billion) of debt on June 19 and 4,094 trillion lira on June 26. «They may not be able to roll it all over, but within their financial accounts there is enough insulation to make the payment,» said Debbie Orgill, an economist with ABN AMRO. The treasury needs to re-borrow from the market at a cost likely to be much higher than the maximum rate of 58.45 percent in its last auction on May 28. Yields on the benchmark April 9, 2003 paper on the secondary market pushed above the psychologically important level of 70 percent this week, trading at 70.59 percent yesterday, from 52.95 at the start of May. Turkey’s recovery from crisis has been burdened by a political arena too lacking in the spirit of consensus. Time and time again coalition conflicts have cost the country dearly in higher interest payments and deterred foreign investment. The coalition government is the 15th government in 20 years and it was a political row between the prime minister and the president that sparked last year’s devastating financial crisis. Present fears about a possible government collapse have been fueled by nationalist Deputy Prime Minister Devlet Bahceli who has reiterated his opposition to controversial political reforms aimed at meeting EU criteria. Bahceli opposes abolishing the death penalty and easing restrictions on the use of the Kurdish language. Ecevit’s party is now seeking support from opposition parties in Parliament to push through the reforms, crucial for Turkey’s EU ambitions. The row has highlighted differences within the three-party government. Bahceli says he will turn a blind eye to Ecevit seeking support from the opposition this time. But he added that if Ecevit made a habit of such conduct, Turkey might need a new government. The lira currency has slid to best bids of 1,547,000 to the dollar on the interbank market from 1,367,000 on May 3, just before Ecevit was first admitted to the hospital. Debt worries If the political impasse worsens or takes time to solve, Turkey may find itself back in a vicious circle over debt. «Time is of the essence… as prolonged uncertainty could rekindle inflationary pressures and renew concerns about debt sustainability… It’s extremely important to put bond yields back on a declining trend,» said Marco Annunziata of Deutsche Bank. Real interest rates, which are calculated by subtracting inflation expectations one-year ahead, were between 11-12 percent at the end of April but have now jumped as high as 28 percent, despite a falling inflation trend and positive signs of growth. Interest rates are barely above the government’s 69.6-percent target average for 2002, and have been lower for much of this year, allowing some breathing room. But the duration of the political uncertainty will be the key. If it continues for long, it may eventually trigger concerns on the sustainability of domestic debt for the year 2003, if not for the remainder of the year, analysts said. «Due to political uncertainties, foreign investors and small local banks are avoiding buying debt, and large Turkish banks’ portfolios are already full,» said a trader at one local bank. «Despite attractive real interest rates and low overnight funding rates, banks may be reluctant to buy from next week’s auctions,» he said. That reluctance has been apparent in this week’s euro-denominated public offering in which the treasury sold 258.9 million euros in a three-day public offering. «The figure is disappointing given that this week’s redemption of euro-denominated paper is 825 million,» said JP Morgan. The treasury plans to borrow $52.6 billion from the domestic market this year, of which it has already borrowed $18.9 billion in the first four months. Domestic debt stock stood at 123,290 trillion lira at the end of April. Analysts say markets have not yet priced in an early election, since Turkey’s three coalition parties are expected to find a way to stay in the government. Opinion polls show their popularity at such low levels they might not even make the 10 percent of votes needed to return to Parliament. «Markets still believe that they will somehow find a way to remain in charge,» said a foreign bank economist. «But, the debt rollover risk is always looming and if the dust doesn’t settle, debt sustainability worries may revive.» Istanbul bourse at 7-month low ISTANBUL (Reuters) – Turkish stocks slipped to seven-month lows yesterday and the lira fell after ratings agency S&P said Turkey’s crisis-hit banks were still weak and undercapitalized despite a positive vetting by the country’s bank watchdog. Turkey’s main stock index closed down 3.17 percent at 9,464.52 points with sales in market-heavy banks dominating trade, reversing Thursday’s 0.72-percent rise. The 2001 results posted by six publicly listed banks, which all showed losses, provoked further selling as the day wore on, brokers said. «Standard & Poor’s saying the sector is still weak and its capital adequacy insufficient brought sales in banks led by Yapi Kredi, despite the statement from the banking watchdog,» said Muhtesem Karbas of Anadolu Investment in Istanbul. A senior Standard & Poor’s analyst told Reuters late on Thursday that the results of an IMF-backed audit of Turkey’s banks, at the heart of last year’s financial crisis, were not enough to quash worries about their exposure to further economic shocks.

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