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Out Of The Woods?

23 November 2020 by jbchevrel

Today Turkey CDS retraced +10bp wider, closing at 390bp. That is a consolidation, more than anything else, as Turkey 5y CDS had closed at 560bp earlier this month (11/2). That previous tightening had come mainly after Berat Albayrak, the son-in-law of Turkish President Erdogan, unexpectedly resigned as the country’s Economy & Finance minister (MoF), one day after the CBRT (central bank) governor was fired. Murat Uysal was replaced by Erdogan with the former Minister of Finance Naci Agbal, seen as a move toward economic orthodoxy. The official reason for Albayrak’s departure was an unspecified health issue and the willingness to spend more time with his family. On the central bank side of the equation, confidence temporarily returned after Turkey’s central bank raised its one-week repo rate by 475 basis points to 15%. That took place last Thursday and sets rates closer to where the Taylor rule puts them. This event was met with further strength on the lira and the CDS, such that the recent tight on a close to close basis was last Thursday at 368bp. Friday and today, we have seen some consolidation of this move, ending +22bp wider than Thursday’s tight. And despite the global risk-on tightening move that we are currently experiencing in CDS world. Today’s widening (+10bp) looks subdued compared to the FX move. Indeed, the lira was down 4% earlier today and is now down -5% vs the aftermath of Turkey’s central bank on Thursday. Beyond economic (monetary and fiscal) policies, much of what’s to be worried about Turkey is geopolitics. Recent spats vs France, Russia and less recently the US had weighed on sentiment. Today, the German navy was forced to abandon its search of a Turkish cargo ship suspected of delivering weapons to Libya after Turkey raised objections. The German crew was acting on the orders of Operation Irini, the EU’s mission to enforce the UN Security Council arms embargo against Libya. The lira move has probably been exacerbated by the low liquidity and the opportunity for locals to pile up some dollars at a lower price, to hedge against future Turkish inflation.