Turkey’s 5-year credit default swaps (CDS) hit 520 bp on May 24, reaching the highest level on record since September. The 500-threshold was passed on May 23 and it’s clear international markets are currently pricing in a Turkish default.

The all-time high 5-year CDS level posted for Turkey of 566 was registered last September 4, 10 days before the central bank hiked its main policy rate by 625bp in a belated response to the havoc wrought by the lira crisis.

With the cost of insuring exposure to its sovereign debt soaring, Turkey currently ranks at 4th place in the global league for a potential default. Venezuela, which has defaulted, is the leader by far with a 5-year CDS of more than 70,000. It is followed by Argentina at over 1,000 and Ukraine, which is in the 550s.

Pakistan, the country nearest to overtaking Turkey, has a 5-year CDS level of around 360.

The CDS figures indicate Turkey’s Don Quixotesque President Recep Tayyip Erdogan has managed to plonk himself at an alarming crossroads once more.

Past experience suggests he will now prefer to fuel tensions in Turkey’s polarised society, with the Istanbul mayoral election revote ahead on June 23 presenting ample opportunity for distraction. After the re-voting is over, he might then employ another dazzling U-turn, once more becoming a ‘good kid’ for the markets.

So terribly weary
However, Turkish voters have grown so terribly weary of years and years of political tensions being switched on and off again, while there is a certain excitement in the air as regards the prospects of Erdogan’s nemesis Ekrem Imamoglu, the opposition candidate who scored a shock victory in the local elections at the end of March, winning the Istanbul mayorship to the humiliation of the president’s Justice and Development Party (AKP) and Erdogan himself, only to be stripped of the seals of office by electoral watchdog officials who, at the prompting of the AKP, claimed to have discovered substantial irregularities at polling stations and ordered an election rerun.

The importance of Turkish foreign policy in determining how the chips will fall for Turkey and Erdogan in the months ahead cannot be underestimated, and some significant changes are afoot. Having cried foul at Washington’s demand that Turkey stop importing Iranian oil as part of the aggressive Trump strategy of attempting to drive Iran's shipments to zero, Ankara this week acted as if the angry rhetoric had never passed its lips as it became clear Turkish ports had indeed been closed to Iran’s crude shipments (whether there is anything afoot on the grey market is another matter, but this official blockade at least looks good for Donald).

Then there is the intimacy between Erdogan’s son-in-law and Trump’s son-in-law Jared Kushner, who is expected to announce the Deal of the Century to magically resolve the Palestine question once and for all next month. Might Erdogan, despite plenty of obligatory fist-waving in the direction of Israel, be getting ready to go along with the dodgy Deal? Is he bracing himself to absorb a possible outcry on the Muslim street with a strong hue and cry? Erdogan could certainly do with some big help from the US in settling Turkey’s jittery, brittle markets.

The Erdogan administration is, meanwhile, holding talks with the Syrian Kurds via Trump’s Syria envoy James Jeffrey. Another accommodation between Turkey and the US looks possible there.

Right now, Erdogan’s only real misbehaviour where Washington is concerned is his insistence—repeated ad infinitum—that he is damn well going ahead with a purchase and deployment of Russia’s S-400 advanced missile defence system, due to arrive in July if not sooner. Then there is his stubbornness in not giving up on loose monetary and fiscal policies, which so rattle the markets. But Trump is not big on Nato, so might find a convenient arrangement with his Turkish counterpart when it comes to the Russian missiles, and, as for the global markets establishment fretting over Erdogan refusing to fall in line with orthodox neoliberal economics, Trump will go his own way, he won’t be at their beck and call telling the Turkey’s strongman to get his house in order.

There’s again an excruciating need for a rate hike in Turkey, and there’s a question mark over whether Erdogan can delay it until after June 23, given his ongoing fiscal expansion to achieve a pre-poll stimulus. If he lives up to his word and really starts unpacking the S-400 in Turkey, the market angst won’t be for the faint-hearted.

Some critics are speculating that Erdogan will actually use the S-400 row to evade responsibility for what they believe will be an upcoming economic collapse. The fracas over the detained US pastor, Andrew Brunson, was exploited in just such a devious way during Turkey’s torrid economic summer last year. Rather than look at the relentless economic fundamentals, everyone was glued to developments in the Brunson story.

Erdogan, Maduro and the "leftists"
Back to that CDS league. Could Erdogan afford to take the number one spot from his latest bestie, Venezuelan leader Nicolas Maduro? It doesn’t seem particularly possible given that even Turkey’s “leftists” are inferring that Erdogan should head to the IMF while only pledging lachrymatory support to the “leftist” Maduro’s eyecatching fight against imperialist windmills.

Where Turkey’s concerned, Maduro brings the Erdoganists and “leftists” together. However, pushing poor Venezuelans to dig in in a hollow fight against the US, the biggest buyer of Venezuelan oil, behind a leader who has dramatically polarised his nation and spent massive external borrowings on his devotees, is a different case entirely from personally suffering the consequences of Turkey’s fight against the biggest international financers of your country’s debt-fuelled (and “debt-fooled”) consumption boom under Erdogan's Maduro-esque leadership.

Oh, the dilemmas of the Third World eggheads who don’t want to live under an Islamist dictator but deem living under a “leftist” autocrat as proper for Venezuelans are rather specious! For they are not interested in cutting their enslaving consumption and overcoming the synthetic polarisation in favour of coming together under a logical plan.

So, let’s return to the markets.

Although Turkey’s almightier-than-thou president has left the door open for some unidentified foreign plotters to perform their jealous attacks on Turkey’s economic glory via the CDS market, the fate and control of the lira are supposedly subject to finance minister Albayrak’s “iron fist”.

The local currency was trading in the 6.07s against the USD, down 0.5% d/d, as of around 20:30 local time on May 23, while the Borsa Istanbul’s benchmark BIST-100 index finished the day 1.74% up at to 86,072.

The USD-denominated BIST-100 flirted with its 2009 lows during the week but, despite tremors, the floor didn't give way.

Isbank, Erdogan’s favourite local lender during pre-election periods (our man typically bashes it for its links to main opposition party CHP, even though those result from a bequest left by founder of the Turkish Republic Ataturk), said on May 23 in a bourse filing that it had obtained a 367-day syndicated loan in two tranches of €644.9mn and $323.5mn.

Costs were the same as borne by other local lenders at Libor+2.50% and Euribor+2.40%.

The total amount of Isbank’s loan equalled $1bn, while its roll-over rate of 69% was higher than Garanti Bank’s latest 63% but lower than Yapi Kredi Bank’s 77%, Seker Invest said on May 24 in its daily market watch.

Turkey’s booming CDS level suggested that risk perception towards TRY-based assets has significantly increased, the Istanbul-based brokerage also noted, adding: “In this regard, any reactionary buying at the BIST might well be utilized for profit taking.”

With the heavy bombardment on the economy, in the form of discussions over a possible Turkish default ahead, intensifying, IMF spokesman Gerry Rice came up with some reiterations on May 23 when he was asked about the impacts of the likely upcoming ‘S-400’ sanctions from the US on the Turkish economy during his regular press briefing: “You know, what I'd say on Turkey is that we continue to monitor the economic situation there very closely, and as we've said before—not a new statement, but to reiterate—we recommend a comprehensive, clearly communicated policy package to secure macroeconomic and financial stability.

“Let me add, and again, this is not new; I'm emphasising, reiterating. We've received no indication from the Turkish authorities that they are contemplating a request for financial assistance from the IMF, so the recommendations that I just talked about, they don’t come in that context; just to be very clear about that. On the sanctions and so on, I wouldn’t want to speculate prematurely on the possible impact.” 

'5.50 Robin' throws his hands up
Meanwhile, Robin Brooks of the Institute of International Finance (IIF), who’s known as ‘5.50 Robin’ among Turkish Twitter users in reference to his Teflon fair value for the USD/TRY rate, threw his hands up on May 23.

“After 2 days of meetings with investors, with much of the focus on Turkey, there's a deep erosion of foreign investor confidence, with real money outflows now bigger than in the 2018 EM sell-off. Turkey urgently needs an interest rate defense of the Lira, not more credit growth,” Brooks said in a tweet.

“Foreign investors are so bearish on Turkey because they have learned that elections are preceded by credit booms, which destabilize the BoP and weaken the Lira. They are expecting the same now ahead of the June 23 election. An interest rate defense would dispel that perception,” he added in another tweet.

“So far this year, Turkish Lira is down 15% vs the Dollar, almost the same drop as in 2018 at this point. It is very unusual for EM currencies to see back-to-back weakening and should give policy makers in EM pause. Market sentiment on EM is very negative,” Brooks also said, underlining how idiosyncratic policy errors could break down all clichés.

“One investor this week explained her bearishness on Turkey to me like this: ‘I don't think the government is willing to accept the kind of GDP drop needed to stabilize the Lira. Therefore, there will be more short-term focus on credit-led growth, which is bad for the currency’,” Brooks concluded, forgetting to add that women are smarter. Take heed.