Turkey debt costs jump, lira drops after downing of aircraft

Turkish bonds broke their longest stretch of gains since February, the lira sank and the cost of insuring the nation’s debt rose after Syria’s downing of a Turkish military aircraft heightened concerns over Turkey’s ties in the Middle East.“We are all aware of where Turkey lies geographically and we all know that getting a larger role means bigger involvement in all the regional conflicts,” Viktor Szabo, who helps oversee $8bn in emerging-market debt at Aberdeen Asset Management in London, said in an e-mail on Monday.The yield on benchmark two-year lira bonds jumped 10 basis points, or 0.10 percentage point, on Monday to 8.92%, the most in seven weeks, widening the spread over Russia to 139 basis points, according to data compiled by Bloomberg. The lira weakened to its lowest against the dollar in almost two weeks, while Turkey’s credit-default swaps jumped the most in a month.Syrian forces knew the identity of a Turkish military jet before shooting it down over international airspace on Friday, Turkey’s ambassador to the UN, Ertugrul Apakan, said in a letter to Secretary General Ban Ki-Moon obtained on Monday. Syrian forces also shot at a Turkish rescue plane sent to look for the downed pilots, even after Turkey “established co-ordination with the Syrian authorities,” according to the letter.Syria had earlier responded to Turkish accounts by giving its own version of events, emphasising that the Turkish F-4 Phantom aircraft had entered Syrian airspace. While the destruction of the Turkish F-4 was an “accident,” it was also a defensive act following a “clear violation of Syrian sovereignty,” Syria’s Foreign Ministry spokesman Jihad Makdissi told journalists on Monday.The tension with Syria undermines the “zero problems with neighbours” policy that has been the backbone of Prime Minister Recep Tayyip Erdogan’s diplomacy since he came to power in 2003. Trade with Syria plunged 66% to $249mn in the first four months of this year as Erdogan dropped his backing for Syrian President Bashar al-Assad and hosted leaders of the Syrian resistance in Turkey.While Turkey’s trade with the Middle East and North Africa increased 34% this year, compared with a 6.3% decline from the European Union, the biggest source of revenue in April came from Iran, where international sanctions threaten to curtail transactions.The lira weakened 0.5% to 1.8233 per dollar at 5.45pm in Istanbul, the lowest since June 12 on a closing basis.Credit-default swaps on Turkey, rated Ba1, one level below investment grade by Moody’s, rose nine basis points to 250 on Monday, paring their decline this year to 28 basis points. The cost was 247 for Russia, 227 for Poland and 175 for South Africa. The contracts would pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.The extra yield investors demand to hold Turkey’s dollar- denominated sovereign bonds rather than US Treasuries rose eight basis points to 315, higher than the 306 for Russia and 224 for Poland, JPMorgan Chase & Co’s EMBI Global index shows. The average for emerging markets globally is 387 basis points and for European emerging markets 365.“It’s a serious event and the risk of conflict is apparent, but I think the government’s response will be to avoid war,” Bugra Bilgi, a hedge fund manager who helps manage 7.4bn liras ($4bn) at Istanbul-based Garanti Asset Management, said on Monday.Erdogan first called on al-Assad to step down in November after months of saying he should address protesters’ demands and offering Turkish assistance in training Syrian bureaucrats in democratic procedures. The two leaders were once close allies and their families holidayed together in Turkey. In November, Erdogan warned Assad to look at the example of Libyan leader Muammar Gaddafi, “who was killed after turning his guns on his own people,” he said.More than 24,000 refugees have sought sanctuary in Turkey from Syria, Erdogan said on June 5. Turkey shares a border with Syria to the east. The New York Times reported June 21 that US intelligence operatives in Turkey were overseeing a flow of weapons to Syrian rebels, a claim Foreign Ministry spokesman Selcuk Unal denied, according to a Hurriyet Daily News report on June 22. A Syrian general, two colonels, two majors, a lieutenant and 33 soldiers defected from Assad’s forces to join the revolution against Assad and sought refuge in Turkey, HDN reported on Monday.Turkey’s decision to host an early-warning radar system for NATO “creates insecurity in the region,” Iran said last September. Trade with the country increased 40% in the first four months of the year to $6.6bn, driven by an increase in Turkish gold exports as sanctions against the country blocked its ability to trade in foreign currency. Iran replaced Germany as Turkey’s top trade partner in April after buying $1.2bn of Turkish gold in the month.“It doesn’t change the outlook as far as I’m concerned,” Caroline Gorman, who helps manage $7.5bn in assets at GAM International Management Ltd in London, said in e-mailed comments on Monday. “Turkey and Erdogan will manage to be fairly astute regarding regional diplomacy. I’m quite positive on Turkey.”Turkish benchmark bond yields have declined 211 basis points this year as of the close on Monday, the biggest drop in emerging markets behind Brazil, as inflation slowed and the current account deficit narrowed.Turkey’s spat with Syria may show the consequences of Turkish overreach in a volatile region, according to Atilla Yesilada, an economist for New York-based consultancy Global Source Partners.“We have antagonised enough actors in the region and now they are pushing back,” Yesilada said in a telephone interview yesterday from Istanbul. “First to test our resolve and second, to tell us to stay out of affairs of the Middle East and to roll back Turkish influence in the region.”