Moody's Junk Rating Counters Fitch Silver Lining

Moody’s Investors Service rejected arguments for an upgrade used by a competitor as it kept Turkeyrated junk, citing the risks in funding the world’s second- biggest current-account deficit. Moody’skept Turkey at Ba1 yesterday, its highest non-investment level, after Fitch Ratings awarded the nation its first investment-grade ranking since 1994 on Nov. 5.

The lira snapped a five-day gain and the yield on two-year Turkish notes rose to 6.28 percent yesterday from a record intraday low of 6.19 percent two days ago, still below the 6.70 percent on investment-grade Russian debt. While Fitch predicted a “financing shock” and recession inTurkey, Moody’s said it foresees neither and still kept Turkey at junk. Keeping the junk rating could ease pressure on central bank Governor Erdem Basci, who has signaled he may cut rates to prevent a strengthening lira widening the deficit. “Fitch upgraded Turkey with some reservations,” Ozgur Altug, the chief economist at BGC Partners, said in e-mailed remarks in Istanbul yesterday. “Moody’sand Standard & Poor’s want to be more sure. If Turkey does its homework, it could get the second upgrade sometime in 2013.” Turkey, upgraded twice by Moody’s since 2010, is the only country besides Bulgaria to be raised by the company during Europe’s financial crisis, as well as the only European state on which it has a positive outlook, Moody’s analyst Sarah Carlson told journalists in Istanbul yesterday. Its $800 billion economy makes Turkey the largest junk-rated nation covered byMoody’s, according to the company’s report yesterday.

DEFICIT FUNDING
The nation’s reliance on loans and foreign-exchange deposits of companies and households to finance the current- account deficit renders the country “susceptible to sudden shocks in investor sentiment,” the Moody’s report said. The current-account gap is structural, funded by “volatile sources” and won’t improve anytime soon, Carlson said. Turkish two-year yields have fallen 86 basis points since the Fitch upgrade. They have declined 473 basis points, or 4.73 percentage points, this year amid moderating inflation. “Turkey has already crossed the Rubicon in the ratings sphere and has been trading as an investment-grade credit for some time now,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in e-mailed comments yesterday. “While a move to investment grade matters, perception of sovereign creditworthiness matters more, and right now this is playing in Turkey’s favor.”

DEFAULT SWAPS
Five-year credit-default swaps on Turkey fell three basis points to 144 yesterday. That’s down from 287 at the end of last year and compared with 148 yesterday for Russia, which Moody’s rates three levels above Turkey. The contracts pay the buyer face value in exchange for the underlying securities or cash, and declining prices signal improving investor perceptions of a borrower’s creditworthiness. The lira fell 0.4 percent to 1.8023 per dollar at 5:05 p.m. yesterday in Istanbul, paring this year’s gain to 4.9 percent. That’s still the biggest appreciation in emerging Europe after the Hungarian forint and the Polish zloty. The decision by Moody’s not to raise the country’s rating may have a positive effect, according to Societe Generale SA. “Another upgrade would have triggered even more flows to Turkey, which the central bank is trying to control,” Gaelle Blanchard, a strategist for the Paris-based bank in London, said by e-mail yesterday. A second upgrade could fuel “a surge in credit, booming domestic demand and imports and a massive current-account deficit, plus inflation,” Blanchard said.

RATING CHANGES
Predicting the consequences of a rating change by S&P or Moody’s may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974. Yields were measured after a month relative to U.S. Treasury debt, the global benchmark. Turkey’s current-account gap may fall to about 7.4 percent of gross domestic product in 2013 from 7.8 percent this year and 10 percent last year, according to Moody’s. The deficit is the “largest credit risk facing the country” and is likely to persist given the nation’s energy shortfall, reliance on imported goods to produce exports and low savings rate, it said. The gap narrowed for an 11th month in September as a slowing economy curbed imports, while exports driven by sales of gold accelerated. Overall Turkey has been “one of the rare good news stories” during the European debt crisis, Carlson said.

EXTRA YIELDS
The extra yield investors demand to hold Turkey’s dollar- denominated bonds over U.S. Treasuries dropped five basis points to 188 yesterday, according to JPMorgan Chase & Co.’s EMBI Global Index. The emerging-market average was 294. Turkish two-year notes are the best-performing debt of that maturity among 19 major emerging markets tracked by Bloomberg this year. “The most critical event of the past month was undoubtedly the crowning of Turkey’s soft-landing story with an investment grade,” Haluk Burumcekci, chief economist at brokerage EFG Istanbul Securities, said by e-mail from Istanbul yesterday. “We would expect the favourable trend to continue.”

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