Turkey’s default risk at new high

Turkey’s default risk at new high
Update: 16 July 2022 13:14
A+ A-
Turkey’s risk premium for CDS reached 900 points, carrying the country to 20th place in the list of countries with the highest default probability

Turkey’s five year risk premium for CDS (credit default swap) broke a new record and reached 900 points on Friday, as the Turkish government struggles to find external finance amid tight monetary policies across the globe. 

The CDS is basically the premium paid against the risk of non-payment of dollar-denominated Eurobonds issued by Turkey.

A CDS premium of more than 300 points is considered "too risky" for international financial resources. In this case, the cost of borrowing in dollars for Turkey becomes 12 percent, with the addition of the 9 percent interest rate corresponding to the 900 points risk premium, on top of the US five-year bond rate of 3 percent, said Mustafa Durmus, Professor of Finance in the Hacı Bayram Veli University in an interview with Medyascope.

Durmus said that Turkey’s economic factors played a decisive role in the rapid increase of CDS but Turkey’s refusal to implement the European Court of Human Rights’ ruling to release Osman Kavala and a possible offensive against Northern Syria might have had an influence on its rise.

Speculative and short-term profit-oriented capital inflows to countries like Turkey started to slow down and capital outflows would increase, Durmus said and added: “At this point, Turkey's CDS score is of great importance. When indicators of a country deteriorate, international investors worry about the default risk and stop their investments or reduce them. So when a complete insecurity problem arises, it first reflects on the CDS premium. This is what Turkey is experiencing right now," he said.

Durmus said that some indicators directly related to debt default in Turkey have deteriorated, and that Turkey ranked 20th among the countries with the highest probability of defaulting.