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Emerging MarketsEM CEE

Ain’t nothing but a number

Yields on Turkey’s sovereign debt hit 20% this week, stoking fears of a debt crisis. But breaking the purported psychological importance of the 20% ceiling does not add much to the well-established litany of issues facing the country’s economy.

Turkey’s economy is undoubtedly in serious straits. No healthy economy has inflation nudging 16%. Turkish president Recep Tayyip Erdogan’s desire for cheap credit is doing the lira no favours which, combined with the nation’s steep current account deficit, leaves it dreadfully vulnerable to problems of unsustainable debt.

All that is before we even touch on the sanctions the US is imposing because of Turkey’s refusal to release a US pastor it is detaining.

Turkey suffered a failed coup attempt in July 2016 and returned to the market in October of that year. Is its position now worse than it seemed then? If you look at its cost of debt, then the answer is a resounding yes. The secondary market yield on 10 year Turkish sovereign paper in July 2016 was 9.5% — around half its present level.

On top of that, markets are getting even tougher. Central banks around the world are tightening monetary policy and the quantitative easing taps are running dry. Money is being pulled out of emerging market portfolios in favour of investments less vulnerable to a strengthening dollar. 

Should Erdogan warm up to the idea of curbing inflation through high interest rates, or offering the central bank a chance to do its job without his interference, Turkey’s cost of debt might improve.

Alternatively, the country could steam deeper into a crisis. In any case, the lurch in the country's cost of debt this week doesn't tell investors anything they shouldn't already know. 20% is not a magic number any more than 19.9%.

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