Turkey: Credit Default Insurance at Record Highs, Bond Escape: State Bankruptcy Ahead?

From the stock market briefing. – the SHAREHOLDER editorial bulletin: Rampant inflation and the ongoing economic crisis in Turkey are fueling fears of a government default. On Monday, hedging a $1 million package of Turkish bonds against default became extremely expensive. There are many signs of an impending national bankruptcy.

The ongoing economic crisis in Turkey is fueling fears of a government default. Coverage of a $10 million package of Turkish bonds against default jumped $12,000 to a record $837,000, data provider Markit said. Reuters With.

According to the website WorldGovernmentBonds.com, the cost of five-year credit default insurance rose by more than 15 percent to a new all-time high of nearly $800 on a monthly basis alone. In one year, these credit default swaps (CDS) have more than doubled. At the same time, investors are pulling the country’s bonds out of their portfolios. Turkey’s 2034 dollar bonds plunge (see chart), while yields rise to an all-time high of 10.3 percent.


Turkish dollar bond twelve-month chart (through February 2034, ISIN US900123AT75)

Last Thursday, Turkey’s finance ministry announced it would issue new lira government bonds in what it said were new “solution-focused steps” for the ailing economy and extreme inflation. The new domestic bonds are said to be linked to revenues from state-owned companies. This is intended to encourage the saving of lira assets.

At the same time, the central bank raised the required reserve ratio for lira cash loans from 10 percent to 20 percent, while the banking regulator changed the maturity limit for consumer loans. After all, the lira was able to temporarily stabilize afterwards.

Ratings firm Standard & Poor’s reported on Wednesday that there is a growing risk that Turkey may have to introduce additional capital controls if pressures on its currency and financial markets continue to mount.

The lira has fallen 23 percent this year alone, adding to last year’s 44 percent plunge in value triggered by a series of unorthodox central bank rate cuts.

Turkey suffers from inflation of more than 70 percent. In May, consumer prices rose at their highest rate in nearly a quarter century. Goods and services cost an average of 73.5 percent more than the previous year; this is the highest rate of inflation since October 1998. Normally, the central bank would have to counter this and tighten monetary policy. However, Turkish President Recep Tayyip Erdogan recently announced more interest rate cuts by the central bank.

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