Turkey

Markets don’t like governments engaging in unnecessary economic self-harm, and after numerous warnings and cautions on its unsustainable economic policies, investors are now abandoning Turkey —Brexit Britain should beware.

The market chaos caused by investor panic over Turkey hit the shares of European companies this week, but the risk of a systemic crisis is low, said analysts.

The Turkish lira rebounded strongly on Tuesday morning in London while sovereign CDS rallied 40bp — but investors are still calling for more action and concerns remain high that without a big rate rise from the Turkish Central Bank, the selling will shortly resume.

The currency crisis in Turkey has prompted analysts to hone in on the balance sheets of European banks, as they look for the first signs of an increase in income volatility following the introduction of the new IFRS 9 accounting standard.

The cost of insuring Turkish government debt has shot up as Turkey’s president Recep Tayyip Erdogan has refused to give way in a dispute with the United States.

Equity and debt markets are preparing for a full blown crisis in Turkey and even though its currency pulled back from its early-week lows, investors are worrying about debt defaults.

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.

UniCredit’s senior management team had to fend off a barrage of questions about the bank’s exposure to Turkish bank Yapi Kredi this week, as yields spiked on Turkish local currency debt and the lira slid further against the dollar. UniCredit’s equity stake is accounted at €2.5bn, but worth less than €1.2bn in today’s market.

Emerging market sovereigns are regarded as stalwarts of the credit default swaps (CDS) market. Their liquidity is dependable, and participants can usually trade in large size with relatively low transaction costs and little price impact.

Global banks are, for the moment at least, standing by their Turkish clients despite deepening financial problems in the country. The yield on Turkey’s 10 year sovereign bond hit almost 20% this week, driven to this vertiginous height by diplomatic tensions with the US and an economy riddled with problems. Silas Brown and Lewis McLellan report.

Fallout from a diplomatic incident drove yields on Turkish sovereign paper to almost 20% this week. While yields have come off their highs, the picture remains bleak for the beleaguered nation.

Sri Lanka and Turkey are preparing to sell their first Panda bonds, enticed by falling funding costs in China's bond markets. But given they both have lower credit ratings than previous sovereign Panda issuers, they may face an uphill battle as regulators scrutinise their finances.