Turkey CDS rates indicate bankruptcy now is possible
On the 17th of July, according to Bloomberg Turkey said it’s raising the amount of foreign exchange lenders must hold at the central bank, a move that was expected to increase the nation’s reserves by around $9.2 billion. However, these expectations proved unjustified. Since then, foreign reserves decreased by -$3 billion! Gross Foreign reserves plummeted on 7 August 2020 to $46.67Billion , an amount approximately half of that the country had in the beggining of 2020 ( $80Billion).
Net foreign reserves of Turkey are now negative if currency swaps are taken into account, as they constitute foreign debt.
At the same time, the Turkish Lira depreciated abruptly against all major currencies, standing now at 7.29 TL/USD rate, versus 6.70 that was a rate the currency was stabilised during the last three months, after the country managed to get a $15 billion currency Swap from Qatar, a country that is linked with Turkish army presence, for ‘security’ issues.
Even worse, Turkey CDS rates are at 595.42 bps, a 25% increase during the last month, placing now Turkey the third country globally for bankruptcy, behind the defaulted Argentina and Venezuela. While this level is still lower than 620 bps, this value reveals a 9.92% implied probability of default, on a 40% supposed recovery rate .
Why CDS rates matter?
CDS ( Credit Default swaps ) are the so-called risk premiums, that indicate the ‘cost’ for someone to insure their money in the event that an obligation such as currency bond is not paid. In other words, the PRICE of CDS is the safest indicator of whether an organization, company or state will go bankrupt.
Why now Turkey must be cautious
While the previous time the CDS rates exploded(May 2020), the currency market and reserves where still manageable, this time they are in far worse situation. The probability of bankruptcy increases as a pile of foreign debt, mainly from Turkish state-related companies must be served, within the next weeks. Meanwhile, the country has been devasted by the huge war expenses in the imperialistic wars of Turkey in Syria and Libya. In particular, the Budget Deficit in June reached TRY 19.4bn (was TL12.1bn in June 2019) while Treasury’s cash balance deficit, a leading indicator was at TL26.8bn in June, increasing by TL15.7bn compared to the same period in the previous year!
Conclusion
Turkey seems to be in big trouble by the fact that Erdogan’s government misallocated the country funds in imperialistic wars, instead of supporting the country needs in battling the Covid-19 problem. This eventually made the country unattractive to Tourists in a period that hard currency is badly needed, while being at times of a potentially high season for tourist income, leading to an additional -$10bn loss of inflows in hard currency from Tourists in July and August.
In brief, it seems that the imperialistic dreams of Erdogan coupled by the coronavirus effect,
had jeopardized the country’s financial viability and bring now the country
closer to the doorstep of the International Monetary Fund.
new-economy.gr