Thursday, December 31, 2009

EconNews Roundup

TURKSTAT has released the latest seasonality/ working days adjusted October Industrial Production and 3Q GDP data.

Economic summary of the year, to which I would also add the never-ending IMF saga.

The national minimum wage (as opposed to regional) is one of the craziest results of statist and centrist policymaking.

This will be the last EconNews Roundup of the year; see you next year:)

It seems you can fool some people sometimes, but...

it seems you can also fool all people all the time. At least that's what I have got the latest IMF rumors.

Following Econ tzar Babacan's comments on the possibility of a deal with the IMF, where the tzar actually did not say anything we did not already know, rumors spread that PM Erdogan had disclosed the government and the Fund had come to an agreement at an internal AKP meeting last night.

The tax hikes announced today only spiced things up, as they were seen as the government's efforts to bring the fiscal books agreeable to the Fund, even though it was clear from the 2010 budget figures that tax rises were on the way, as I had argued in this week's Hurriyet column.

To sum up, developments of the past 24 hours, did not add much new to our information sphere on the IMF front. But Turkish assets surged nevertheless, with the benchmark rallying 75bp in the course of about 24 hours, before settling at (and closing the year at) 8.9%.

By stating boldly that the markets are being fooled again, I realize that I might be able to eat my words. But followers of the never-ending IMF-Turkey saga have seen this exact ploy play out at least a dozen times in the past couple of years.

If there is indeed a deal this time around, fine. In fact, I'll be happier than most, as I have one of the gloomiest scenarios for 2010 and believe that an agreement will be extremely beneficial for the Turkish economy.

But all I'm saying is that we have been fooled before many times, especially when Turkish assets don't seem to be performing well. I don't want throw baseless accusations and causation is not correlation, but if you just take the statistician's point of view the negative correlation between IMF-deal rumors and negative Turkish asset correlation in the previous two weeks will be jaw-dropping. I promise I'll provide some numbers if I decide to take this issue in my Hurriyet column next week.

Wednesday, December 30, 2009

Some holiday humor

Word is spreading that there is an economist called Emre Velideli who worked with Bernanke at Princeton.

You'd say someone reversed my last name, except that I have nothing to do with Princeton, other than having visited my friends there a couple of times and my "Hahvahd sucks, Princeton doesn't matter" t-shirt.

In fact, Refet Gurkaynak of Bilkent did indeed work with Bernanke at Princeton, but I have no idea how I got mixed up with him, while at the same time managing to get my last name reversed.

Having said that, it would have been really hilarious if there were an economist called Emre Velideli who had worked with Bernanke at Princeton:)...
Sent by BlackBerry Internet Service from Turkcell

EconNews Roundup

Extensive interview with Isbank CEO Ersin Ozince. Note that a simple financial programming exercise reveals that with the tight liquidity I project for 2010, the 15% target is quite challenging, although I am only speaking for the overall sector; I wouldn't know if Ozince plans to pull rabbits out of his had; after all, as I had discussed before, state banks have responded quite differently from private banks on the credit front this year. Also interesting are comments that banks make money when interest rates are moving down but not when they are stable or on upwards trends. As I was arguing a couple of days ago, my retail banker friend is quite happy with my interest rate projection for next year. Anyway, as I mentioned on Monday, I'll come back to this in a couple of weeks.

In a similar fashion, TSKB hopeful for Turkey as well.

Turkish economists continue their interest in the Familiar Mediterranean Disease...

Monday, December 28, 2009

Weekly Hurriyet Column: Year of easing comes to an end

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I was too tired to come up with a cheesy title this time around. As for the article, one interesting follow-up question from a reader was on the impact of my scenario on banks: It was banking on rate cuts this year, and with that trend reversed, the obvious conclusion is that 2010 will be tougher for the banks.

It may well be, but the answer is not so obvious. For one thing, it is obvious that it won't be the bonds that are will be the driving force of bank profits, but retail. In fact, a senior retail banker friend is crossing her fingers for my scenario to materialize, as it will mean more profits for her group. As for the banks' balance sheets (and the bonds that they carry) a closer look and anecdotal evidence reveal that banks have been successful in shifting some of their load to variable-rates and inflation linkers, so they will not be as vulnerable as commonly expected to the rate hikes.

On the other hand, contrary to common wisdom, I expect credit to stall: Tight liquidity, heavy Treasury redemption schedule crowding out lending and increasing NPLs will be the key characteristics on the credit front, aggravated by some legal factors. But you will have to wait until either the next column or the one after that for the full story on that...

By keeping rates on hold at the last Monetary Policy Committee, or MPC, meeting two weeks ago, the Central Bank, or CBT, officially brought its year of easing to an end.

While the Bank is signaling its intention to hold the policy rate at the current rate of 6.50 percent for a long time, no one is buying. According to the CBT’s bimonthly survey, the policy rate is expected to be 8 percent in a year. A 1-1.50 rate hike is also penciled in most analyst reports, with rate hikes starting in the last quarter. The markets are even less kind, with cross currency swaps or benchmark bonds pricing in a tightening of 2-2.5 percent over the course of next year.

To be able to decide who is right, one first needs to understand how the CBT was able to cut rates much more than envisaged by anyone. For starters, arguing that the Bank just hopped on the global easing bandwagon would not explain why the CBT managed to decrease rates more than most other major Central Banks.

The major factor seems to have been the deep recession, which not only decreased inflationary pressures directly, but also reduced exchange rate pass-through to prices, which had been a major nuisance for the Bank in the past. The CBT was also definitely helped by unexpected (and unexplained) foreign currency inflows, which kept lira depreciation relatively contained after the Lehman collapse. With the economy starting to recover and the so-called UFOs, or unexplained financing objects having stabilized, it will be an entirely different ballgame next year.

Moreover, CBT’s key justification for holding rates, the large output gap, could be tested on two fronts in 2010. First, the latest data paint a mixed picture on the speed and strength of the Turkish recovery. While this is definitely not my base-case scenario, a pick-up quicker than as foreseen by the Central Bank would mean that inflationary pressures could be building up earlier than expected.

In fact, even with a slow recovery, the economy could be heating up unexpectedly if the country’s output gap turns out to be less than the Bank’s estimates. Some recent Fed and IMF papers argue that deep contractions lower potential output, and the sticky unemployment rate offers some early alarm bells that this could be the case for Turkey as well.

To make matters worse, as Central Banks around the world, especially Turkey’s peers, start to tighten, keeping rates on hold will be increasingly difficult for the CBT, as it could not only create pressure on the lira but also hurt the Bank’s credibility.

Speaking of credibility, the Bank is likely to face an uphill battle managing expectations next year. Rather than being supportive of monetary policy, fiscal policy, with the heavy redemption schedule early in the year, is likely to add to inflationary pressures.

While the government has not disclosed much, doing the math from the budget figures reveals administrative price and excise tax hikes are in the pipeline. This, coupled with base effects, means that inflation will be climbing in the first half of the year, which could also destabilize inflation expectations.

Last but definitely not the least, although most commentators ignored it, the lax medium-term inflation target, as outlined (but not fully justified) in the latest Monetary and Exchange Rate Policy report, could turn out to be a real obstacle to anchoring expectations.

The Central Bank will certainly try to postpone the rate hikes as long as possible. But I doubt that they will be able hold on until the last quarter, and may begin hiking rates as early as the second quarter.

Then, we’ll see who is right on the amount of the tightening, but I am putting my money on the markets this time around.

Friday, December 25, 2009

EconNews Roundup

Standard Unlu has revealed its forecasts for next year. Although it is not in the article, they expect the Central Bank to start hiking up the policy rate in the second quarter, which is earlier than consensus expectations but in line with the view of your friendly neighborhood economist's outlook. This is, BTW, the topic of next week's column.

A new regional survey says that Turkey is supposed to be the first country to overcome the crisis in the region. I have yet to see the study, so no comment for now...

...But in the meantime, two thirds of Turkish companies were in hiring freeze during the crisis. So if this and the former study are both right, these Turks must be crazy- or maybe, we are talking about a jobless and joyless recovery...

Wednesday, December 23, 2009

On Turkish Regional Unemployment

TURKSTAT just released employment statistics by province for the very first time, as summarized very neatly in the Hurriyet Daily News. I could devote pages and pages to discussing the statistics, but I think the single most important observation could be summarized by comparing Northeastern and Southeastern Turkey, with the former having high participation rates and low unemployment and the latter vice versa.

It is interesting to note that both regions are characterized by poverty, but in NE, poverty has been working in favor of the region's unemployment statistics, as a huge migration has taken place to the nation's large urban centers, especially to Istanbul. Whereas there has been migration to the metropolitan areas from SE as well, there has been also considerable migration from the villages to the region's towns and cities as a result of the armed conflict with PKK, aggravating poverty and unemployment in the region. It should also be noted that agriculture is the main culprit behind NE's high labor force participation, as everyone works in the fields and gets subsistence living. It is tough to get the same effect from livestock, SE's bread and butter. It is also tough to raise livestock in the middle of armed conflict, I should say.

I should stop here because this piece is becoming a tad bit too political for my taste; besides, I don't want to be an Ergenekon casualty:) But all this has made me remember a nice little anecdote: While we were visiting him for the World Bank Higher Education Report, a prominent labor market economist (whose name I can't reveal, as I have not asked for his permission) told us (me, a couple of World Bank officials and a couple of other consultants) that he had tried to work with the same surveys these unemployment statistics are coming from some time ago, but TURKSTAT had offered him the surveys without the city codes. When he inquired why, he was given the following response: "If you calculate unemployment rates by province, the results may cause separatism." I guess the idea was that higher unemployment rates in the East and Southeast (as if we didn't know) would cause unrest and cause separatism.

Well, times have changed, now it seems TURKSTAT is advocating separatism itself:) A small side effect of AKP's demokratik acilim perhaps:). But given my response to the data, maybe TURKSTAT was right after all:)...

If this all sounds funny, note that, around the same time, an expert at the State Planning Organization was against planting trees in the SE because terrorists could hide in them. Then, this will all seem tragi-comic.

BTW, my own travails with TURKSTAT warrant a separate blog entry (or several), but all that will have to wait for now...

Monday, December 21, 2009

Weekly Hurriyet Column: Familiar Mediterranean Disease

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. For a change, I am giving up the usual cheesy movie reference in favor of a cheesy medical reference. As for the article itself, Gillian Tett reports that now banks are starting to worry about sovereign risk. As for Greece, its budget cut process has begun. And I argue in my piece, despite Greek claims their austerity measure is better than Ireland's, the latter seems to be doing a better job in swallowing the pills. Now that I have vindicated myself, on to the article:

The Greek fiscal tragedy next door entered a new phase last week when Prime Minister Papandreou announced the government’s austerity measures, which markets did not buy.

The PM’s speech, involving flashy phrases reeking of symbolism such as “the country must change or sink” or “we must embrace Spartan austerity”, was reminiscent of King Leonidas egging his 300 Spartans on to battle at Thermopylae. Equally encouraging was his admittance that the country’s woes go far beyond public finances.

Even if you dismiss his emphasis on corruption as an attempt to build consensus for unpopular reforms, competitiveness and higher education are two areas begging for reform. Compared to its counterpart across the Aegean, the Turkish Statistical Institute looks like a pillar of integrity, which has led Finance Minister Papaconstantinou to set up an independent statistics agency. Then, why did markets shrug off these gallant efforts and S&P downgrade Greece, following in Fitch’s footsteps?

For one thing, there is a tilt towards rosy estimates of revenue increases and new revenue streams rather than expenditure cuts in the government’s plan. As for the cuts, and most of the measures for that matter, there is worryingly little detail. And despite the PM’s assurances of pay freezes and decreases in allowances for civil servants, there is still talk of public-sector wage hikes in 2010. To add insult to injury, Greece seems to be suffering from lack of credibility.

But Greece is not alone. Italy, Spain and Portugal face a challenging year ahead as well. A case that has been off the markets’ radar for now has been Portugal. With the 2010 budget deliberations finalized in January and with a high rollover program for next year, it is conceivable that Portugal will be the second member of the PIGS to feel debt pains.

Another case of market ignorance, approaching delusion, is Turkey, with the latest budget figures declared positive by almost all the foreign outfits. With the sharp rise in yields earlier in the week having offered tempting buying opportunities, I would have claimed they were simply talking positions were I not such a good-mannered gentleman. While a couple of quick calls to bond traders did confirm large foreign names on the buy side, I’ll just wait for the official statistics.

To move from the trees to the forest, as Barclays Capital highlights in a recent note, the IMF, OECD and European Commission have identified that successful fiscal consolidation depends upon current expenditure cuts as opposed to revenue increases, including social spending, sometimes accompanied with a fiscal rule or multi-year target.

In practice, as BarCap notes, this implies that civil servant wage and social benefits cuts as well as pension reforms are key elements of successful fiscal adjustment. On the other hand, adjustments that would rely solely on duty hikes, indirect tax increases, fiscal fraud measures, or “savings” without any specification are unlikely to qualify as rigorous.

When you look at fiscal consolidation efforts through these lenses, it becomes clear that Latvia, Hungary and Romania are on the right path. And despite Papaconstantinou’s claim to the Financial Times that the Greek deficit reduction plan was more aggressive than Ireland’s, the latter surely wins more check based on the criteria above.

And this is also exactly where the 2010 Turkish budget gets it all wrong with its knockoff fiscal measures and over-optimistic revenue projections. Moody’s recently warned that 2010 could be the year of sovereign risk if developed countries could not get the timing of exit strategies right.

If that happens, Turkey could easily find itself at the PIGS’ tails.

Tuesday, December 15, 2009

Interesting Picks

In the same of revitalizing my popular interesting picks, although I still have not been able to return to tracking the blogosphere yet:

Interesting distinction between liquidity and monetary policy- a distinction our Central Bank has not willing to do. And perhaps rightly so: As I note in my weekly column (have mentioned repeatedly ever since the bond-buying business came up), the risk that its liquidity measures will be perceived as fiscal accomodation or debt monetization are much higher in Turkey, although they are by no means negligible in the developed countries either.

A few hours after I posted on the need for fiscal consolidation in Greece, Portugal and Turkey, Greeks announced their consolidation plans, which seem to far from satisfactory.

EconNews Roundup

I have been struggling between the desire to do a daily news summary on the Turkish economy and the absence of enough items in English to do a daily. I decided to "solve" the issue by reporting on items on the Turkish economy besides the news such as research and policy papers. I also plan to revitalize the international version soon, which I will continue to call "Interesting Picks". So no more "Interesting Picks Turkey", which are now integrated into "EconNews Roundup". So, here it goes:

A new Central Bank paper on durable goods price dynamics; the surprising result is that FX does not play an as large role as I would have expected (in Turkish only).

In my piece on Portugal yesterday, I compared how Portugal, and Greece for that matter, resemble Turkey in their knockoff fiscal measures. As loyal readers would know, lack of a credible fiscal consolidation is one of the recurring themes in my Daily News columns. Mary Stokes of RGE has managed to squeeze all my arguments and more into a well-written piece: There is even a reference to your friendly neighborhood economist (fee-based service).

Simulation to help prevent future crises- with some Turkish help...

When the latest statistics are released, we are likely to see that unemployment is on the rise, at least for seasonal reasons.

IMF emphasizes social security and informal economy key issues that need to be tackled.

The surprise rise in industrial production (from last week); for my take on this, see my latest column.

Monday, December 14, 2009

Weekly Hurriyet Column: Box of bittersweet chocolates

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As you can see, I could only last two weeks without a cheesy movie reference of a title, and this one is one of my all time favorites.

As a great American philosopher once said, life is like a box of chocolates; you never know what you are gonna get. That’s certainly true for Economics, as I found out after last Thursday’s busy agenda.

While third quarter growth came in slightly better than expected, consumer demand is still weak despite all the tax incentives. And although its rate of contraction is decreasing, private investment remains low notwithstanding the encouraging upward crawl in machinery investment. Without a significant improvement in consumer confidence, capacity utilization or the uncertain outlook, it is not realistic to expect strong investment spending.

Moreover, revisions to the first two quarters have decreased the unexplained gap between the manufacturing component of GDP and industrial production. As third quarter manufacturing is also out of whack with the quarter’s production figures, I would not be surprised to see the third quarter growth figures revised down when final quarter data are released.

Speaking of inconsistencies, November capacity utilization was a wake-up call to those rejoicing over Tuesday’s surprisingly strong October industrial production reading. It is nevertheless a welcome development that manufacturers are becoming more positive on domestic demand. So are the CNBC-E consumption indices for November, which are creeping up. In sum, the latest real sector data, while all but rule out the dreaded W recovery, do not offer more than a very gradual revival.

As for the main events of the day, the Treasury and the Central Bank noted, in their annual Financing and Monetary Programs, that their baseline scenario is one without an IMF program. But even a casual look at the Financing Program reveals exactly why the IMF program would be a good idea. With lira rollover ratio at over 100 percent, fiscal dominance could be a drag on growth.

In this sense, the continuation of loan growth, to which Central Bank President Durmus Yilmaz alluded during the press conference for the Monetary Program, is a bane disguised as a boon. Crowding out has not been a real issue so far, as loan demand has remained weak. Thursday’s weekly lending data hint that potential borrowers will hit Chinese walls early in the year, when the Treasury’s redemption schedule is the heaviest.

Another case for the IMF could be built from the balance of payments. While Thursday’s surprisingly large October current account surplus will likely be revised downwards, as has been the case for the last three months, traces of the challenging external outlook can be seen in the capital account.

The weak FDI and portfolio flows, corporate deleveraging and normalization in net errors & omissions all seem to scream that, contrary to what many –including Fitch- claim, external financing will be challenging next year. The dismal capital outflow outlook also supports the tight liquidity argument, as it is not realistic to expect a large monetary expansion, and therefore an increase in financial sector’s debt absorption capacity, without an increase in net foreign assets.

In this sense, the Central Bank’s insistence that its bond-buying has nothing to do with the liquidity shortage is truly remarkable and equally understandable, as it would be disastrous if its actions were seen as fiscal accommodation. Although the Bank has deserted the earlier collateral argument in favor of technical reasons, Yimaz spent a lot of time at the press briefing talking about the liquidity squeeze, which he expects to materialize later in the year than I foresee.

It appears that Thursday’s box of chocolates was a mixture. While most commentators have tasted the sweet ones, I have been blessed with the bitter.

Next up, Portugal?

Surprisingly, it has not been Spain that got the most spillover from Greece's woes, but its neighbor in the Iberian peninsula famous for its sweet wine and most overrated football player. In fact, according to Nomura, this isn't a surprise, as they note:
Recall the Socialist government was returned to power in the September elections and promptly revised its 2009 budget deficit forecast to 8.0% from 5.9%. While much lower than the revisions that occurred in Greece, the situations do have clear similarities. And with 2010 budget deliberations not due to be finalized until January, we expect this to come much more into focus. We also see Portugal as one of the higher-risk credits on the score of rollover burdens, with a higher proportion of its debt to be recycled over in the coming year.
The graphs below are from the same research note and summarize not only Portuguese bonds' relative underperformance, but also note that the future looks challenging as well.

I don't want to relate everything to Turkey, but when I also think about Ireland and Latvia, whose bond markets have been doing relatively well of late, I tend to think that it is after all, mostly fiscal, as the IMF stands for. After all, Spain and Latvia have managed a fairly bit of fiscal consolidation. According to a recent research note from Barcap:
The IMF, the OECD and the European Commission have identified that successful fiscal consolidation depends upon current expenditure cuts as opposed to revenue increases, including social spending, sometimes accompanied with a fiscal rule or multi-annual target. In practice, this implies that civil servant wage cuts, social benefits cuts and pension reforms are key elements for a successful fiscal adjustment. Adjustments that would rely exclusively on duty rises, indirect tax increases, or fiscal fraud measures or “savings” without any specification are unlikely to qualify as rigorous.
When you look at Ireland and Latvia, you see that they have engaged in the right kind of fiscal consolidation, as this is exactly what they have been doing. And this is also where the 2010 Turkish budget gets it all wrong!

I think I have found the topic for next week's column already:)....

Sunday, December 13, 2009

All missing columns posted, finally:)

I just posted the last missing December column, the one from last week. In fact, I even managed to squeeze in a news summary in the process.

As I had already posted the missing November columns yesterday, the blog is officially up-to-date. And I intend to keep it that way this time around:)

EconNews Roundup

I think that Turkish banking will become a barrier to the recovery, rather than for the crisis, as I argue in tomorrow's column, but in any case...

I also summarize my take on the 2009 Treasury Financing and Central Bank Monetary Policy programs at my column.

One of the byproducts of these programs was that we now know that both the Treasury and the Central Bank have a sans-IMF baseline scenario- also in my column tomorrow.

TUSIAD is right to note that uncertainty and unemployment are likely to be two of the biggest challenges of the Turkish economy in the near term. As I discuss in tomorrow's column, both are also key factors affecting private investment spending.

Enough shameless self-promotion: A recent survey on changing consumer opinions/behavior during the crisis.

A jargon-buster (thanks to David and Michael for reminding me this great term) on ratings. You can see my take on the ratings upgrade at last week's column, which assumes a basic knowledge about ratings, so this piece is kind of prerequisite on my column:)...

Saturday, December 12, 2009

Missing November columns posted

I finally managed to post (and archive) the three missing columns from November (9th, 16th, 23rd; all at the respective dates). If you have already read them, the final one includes a lot of additional footage, so you might want to have another look at that.

To make sure those who are seeing these columns for the first time do not feel intimidated by the large flow of articles, I'll wait a day or so before I post the missing December articles.

Until then...

Tuesday, December 8, 2009

A couple of wods on October Industrial Production

IP came in at 6.5% yoy in October, significantly above expectations of -3.0% yoy. Part of the figure reflects base-year effects, as last October had fewer working days due to Ramadan holiday. While TURKSTAT will not release seasonally-adjusted figures until the end of the moth, my own calculations bring the raw 6.0% monthly increase to 1.5-2.0% after adjusting for seasonality and working days, which is still quite an accomplishment.

Without looking at the data, one would speculate that the strong figure is due to the special consumption tax breaks working their magic, but a casual look at data reveals that the rise in IP is too broad-based across sectors. It is normal for IP to rise after the destocking going on for the past few months, but such a strong rebound is rather surprising.

Moreover, IP is totally out of whack with other real sector indicators released earlier such as PMIs, real sector confidence and most importantly capacity utilization, which usually do a decent job of forecasting IP. That's why economists were so off the target this time around.

In sum, today's release is too good to be true, and a revision might bring it back to earth in a couple of months. In this sense, Thursday's November capacity utilization will provide a reality check- a strong reading there would make me feel more comfortable towards today's figure.

Back again:)

After a long absence, I am back at blogging again.

I have a word on two on the latest Industrial Production figures, which I will be posting soon. Then, the next step will be archiving my Hurriyet Daily News articles. The blog should be tidied up by Thursday or so....

Monday, December 7, 2009

Weekly Hurriyet Column: Despite Fitch’s sales pitch, Moody on Turkey

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I was able to come up with a second sans-movie reference cheesy title in a row:) As for the article, although I did try to assume readers might not be familiar with CDSs, I was not able to build from ground zero, i.e. sovereign ratings due to space constraints, meaning I had to assume that readers are familiar with ratings. Luckily, a recent article from the Daily News summarizes neatly all you need to know about ratings. So it is a nice complement to my column...

No sooner had the ink dried on my claims that Turkey’s fiscal position was being judged too favorably that Fitch upgraded the country’s long-term foreign currency rating two notches up, bringing it to just below investment grade.

It is not often that one’s writings get refuted so quickly, so I had to take a look at the rating agency’s press release. Unsurprisingly, the country’s resilience to the financial crisis as well as its strong credit fundamentals and debt tolerance were at the forefront. After all, a rating, whether for a company or a country, reflects ability to service debts.

More surprisingly, Fitch also mentioned the country’s downwardly mobile trio of inflation, current account deficit and interest rates as well as its strong banking sector and ability to survive without an IMF bailout. It is true that the trio is on the fall, but all for the wrong reasons.

As I reported earlier, statistical analyses reveal that at least half of the fall in inflation is due to global developments, while the ultra-low demand, which has stripped firms of their pricing power, has kept domestic components of inflation tame. In contrast, it was a challenge to keep inflation at single digits even with very high real rates before the crisis.

Similarly, the Central Bank just hopped on the global rate reduction bandwagon, taking advantage of the fact that domestic foreign currency positions’ buffer role against a scramble for foreign currency. One needs only to remember 2006, when a sudden dry-up of portfolio flows and sharp exchange rate depreciation led the Bank to hike rates 4 percent.

As for the current account deficit, it has fallen because the economy has been contracting, and there is not much of a financing requirement as before. For the better or the worse, Turkey’s current account deficit is a structural phenomenon, as the Central Bank papers I outlined two weeks ago show. Although Fitch notes the exchange has adjusted to a more competitive level, price-fixing is hardly the long-term solution to the deficit.

In fact, even if you take Fitch’s arguments at face value, you also have to weigh in the empty half of the glass, and this is where the country’s dismal growth performance comes in. Thursday’s third quarter growth release will secure Turkey’s place among countries most affected by the crisis. Moreover, leading indicators such as purchasing managers and real sector confidence indices are hinting to a slow recovery.

While a rating agency will not be too worried about staggering growth, unless there is a growth collapse, it will even care less about unemployment. For a country of Turkey’s demographics, next year’s expected 3-4 percent growth rate will not be enough to bring unemployment down.

Then, the billion-dollar question is, with elections looming, how far the government can resist to fiscal expansion. But even without such scenario analysis, the fiscal position is in dire straits as it is. With another year of more than 100 percent rollover on the horizon, a tough year awaits Fitch’s mighty Turkish banks as well as their borrowers who will be scrambling for credit.

To its credit, Fitch does mention its worries over the public finances. In fact, while it is true that Turkey has not needed an emergency bailout, the inability (or unwillingness) to reach a deal with the Fund reflects precisely such concerns. And it is also why Moody’s had signaled earlier that it wanted to wait for evidence on fiscal tightening, although at the end, it and S&P will probably have to follow suit and upgrade Turkey by one notch.

But it may pay to be moody on Turkey for now, at least until Thursday, which might be judgment day for the economy’s fate next year.

Tuesday, December 1, 2009

Weekly Hurriyet Column: Greece stuffed on turkey day

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As you can see, I am quite capable of coming up with cheesy titles without any movie references:). Also note that the copy editors caught FeneVbahce and corrected it, to my dismay:). But as long as Azize continues with the whining, fenev will always be fenev:)...

Two remarkable events marked Wednesday night, as Americans were getting prepared for the annual stuffed turkey with cranberry sauce feast.

First, your friendly neighborhood economist’s team Besiktas beat Manchester United 1-0 at Old Trafford after a 3-0 easy home win over Istanbul archrivals Fenevbahce over the weekend. Around the same time and (almost) equally noteworthy, Turkish credit default swaps, or CDSs, at just below 200 basis points, traded flat with Greece’s for the first time ever.

CDSs are derivatives that insure against losses stemming from a credit event. In the context of a country, this translates into a contract that protects against a bond default by that country. A spread of 200 basis points means that it costs 200,000 dollars to insure 10 million dollars of debt.

It then follows that CDSs are an indicator of the market's current perception of sovereign risk. Moreover, it is quite straightforward, after assuming an expected recovery rate, to quantify that risk by calculating the default probability implied by the spread. A 20 percent recovery rate, the market convention for the quotation of many CDS contracts, yields an annual default probability of 2.1 percent for a 200 basis points spread.

This may not seem much, but it is complete catastrophe, to paraphrase Nikos Kazantzakis’ Zorba, if you consider that Greek CDSs were at 5 basis points merely a couple of years ago. In fact, the recent equalization with Turkey owes much more to the upward trajectory of Greek CDSs than to a downward move by their Turkish counterparts, which, despite having moved down from early-year highs of around 500 basis points rapidly during the great spring liquidity flush, have nevertheless been hovering around 200 basis points since mid-summer.

It is important to note that such an interpretation is a little bit simplistic. For one thing, the CDS market, despite its sheer size, is rather illiquid, and according to data from Depository Trust and Clearing Corporation, a clearing house for over-the-counter derivatives, Greek CDSs have been particularly illiquid recently, which means that prices can swing wildly on low volumes.

Even if you adjust for liquidity, you have to remember that CDS spreads also depend on global factors. For example, in my previous life as a bank economist, I and my coauthor Ilker Domac found out that US interest rates and global risk appetite weigh much more on Turkish CDSs than domestic developments. In fact, sovereign CDSs tend to move together a lot although country-specific factors do affect long-run trends and structural breaks.

The sharp rise in Greek CDSs in the last few days owes mostly to Dubai World’s six-month debt standstill. But this still does not tell us why Greece responded to the Dubai jitters more than its peers in the EU, or even Turkey. According to Financial Times’ Gillian Tett, the answer lies in what she coins as the perception of tail risks. Such black swans, as I like to call them, in homage to Nassim Nicholas Taleb, have been off the charts for some time, and Tett is right to note that Greek CDSs have acted as a painful wake-up call.

But unlike Tett and Royal Bank of Scotland’s Tim Ash, whose comments appeared in the special Bayram Edition of this paper, and despite my flashy title, I do not think Turkey compares that favorably with Greece fiscally. It is true that as Ash notes, Turkey’s absolute numbers look much better, but I have been arguing for a long time that simple debt to GDP ratios do not make much sense.

Unfortunately, Turkey’s fiscal position and its implications are harder to decipher than Greece’s, which partly explains the favorable view. This is where I will pick up next week.