12 July 2018 by HCM
Turkey CDS was little changed today after widening 30bps yesterday and 26bps the day before. The CDS is now anchored above 300bps. It is one of the most traded CDS, with close to 500MUSD daily reported cleared notional according to OTC Streaming. This is as Erdogan extended his grip over the Turkish economy, on both the monetary side and the fiscal side. On the monetary side, Erdogan claims the exclusive power to name Central Bank (CBRT) rate setters, and on the fiscal side, he named his son-in-law as economic chief (‘Treasurer and Finance Minister’). Historically, he has always tried to push CBRT to keep rates low to help growth (c7.5% y in Q1), regardless of soaring inflation (c15.5% y in June). As a ripple effect, BBVA underperformed among European financials, due to its exposure to Turkey (c12% net attributable Q1 profit / BBVA largest shareholder of Garanti with a c50% stake). Turkey remains on the top of the EM vulnerability list, with its large current account deficit ($5.9bn vs $5.3b expected in June), uncontrolled inflation and Erdogan in the driving seat. Yesterday we have seen a Turkish referee on the football field, but the country seems to lack a referee to moderate Erdogan’s nepotism. Even imperfect, a Turkish football referee would sound more moderate , as an alternative.