Turkey or Midnight Express Nr. 2?

Midnight Express was released in 1978, 40 years ago. It was a double hit, first as a cult movie and Turkey’s image was severely impacted for a long time. Once again, Turkey is in the spotlight and the impacts of this crisis, will prove to be long lasting.

The unfolding of the Turkey’s situation has been for quite a while on SGG’s watch list and it is time to maybe bring a different angle. 

Turkeys’ lenders have felt comfortable for a long time in the belief that the country was inserted into a solid enough political, legal and financial context. Turkey has a history of sovereign debt crisis and this is the most challenging of all.

Estimates stand around USD 500 billion (Sovereign & Corp Debt)  or about +63% of GDP per capita (+/- USD 6500 p/person).   Let’s face it, there are not many options on the table. The risks to default are running high. Such an outcomet implies too many political and economic variables that Erdogan is not willing to take and or submit to. Turkey does not really have the means to repay its lenders.  

So, what is a good deal for Turkey and the world? This might depend upon Erdogan’s beliefs and lifestyle, but tangible negotiation will probably not take place in a near future.  Erdogan’s most valuable currency now is time.

Creditors hates undefined situation and the risk of contagion is increasing. Venezuela’s situation has been pretty well absorbed by markets, but it happened at a time when capital flows to emerging markets were still generous.  Emerging external debt stands around USD 8.5 trillions and Turkey’s share is near 7%.

Emerging market risk premium might just go north a few hundred basis points to make it up. The following chart is the ratio of the EMHY ETF (corporate & sovereign emerging mkt debt) against the EMB ETF (sovereign emerging market debt). Corporate Emerging spreads are feeling the pressure!

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