Turkish protests drive spreads wider

The current protests in Turkey are dominating news headlines at the moment, easily eclipsing the nation's investment grade credit rating uplift from Moody's last month.

Although there is an increase in the number of quotes on Turkey CDS, it is nowhere near the increase observed for Egypt back in January 2011, at the start of the so-called Arab Spring.

Moreover, the average CDS bid/offer spreads published as part of Markit's CDS Liquidity service indicates the two events are different. Egypt's average bid/offer spread increased dramatically in a few days and peaked at 41bps on 28th January 2011.

Contrary to Egypt, Turkey's average CDS bid/offer spread is so far pretty unchanged at 3bps.

However, on the nation's stock markets, the Borsa Istanbul National 100 Index has lost 12% of its value as the protests continued to their 10th day. Credit followed equities as Turkey's 5-year CDS spread widened 27bps since the start of the events, to close at 152.82bps yesterday - a 7-month high.

It is worth noting that Turkey's CDS curve steepness hasn't changed much, indicating that the current spread widening may be temporary. One thing that is certain is the introduction of political instability risk for Turkey's credit profile, which had existed to some degree, but has now been endorsed.

The introduction of political risk will cost investors an extra $2,700 per year for every $1 million worth of insurance they buy against Turkish government debt in a 5-year CDS contract.

European Central Bank president, Mario Draghi, today left interest rates unchanged at 0.5% after cutting rates to record low in May. Although Draghi hinted at "prospects of an economic recovery later in the year", European credit markets performed significantly poorly.

The Markit iTraxx Europe index took a dent of 5.29bps to trade at 113.2bps late in the session on Thursday. The widening was fuelled by scepticism following Draghi's remarks that the ECB's monetary policy stance would remain "accommodative for as long as necessary".

Markets feared that an end to ECB's monetary policy easing may be on the horizon. In fact European credit markets have run out of steam this week on comments around the continuity of monetary easing measures by central banks.


Akif Ince, Markit Credit

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