- It is tough for Turkey to get a ratings upgrade in the current quantitative models of the CRAs because of factors like debt service to FX reserves ratios and current account deficit to GDP. But nevertheless, perceptions are working in the country's favor, as they are running quite ahead of the reality of the Turkish economy of late.
- We agree that it is the relative standings that matter; after all long term obligation ratings are opinions of the relative credit risk of fixed income obligation with an original maturity of one year or more, as Moody's notes. But we also agree that it is how peers are doing that matter. In that sense, Mexico, Russia, South Africa, and Brazil's performance may be more important that The Usual Suspects' woes.
- A common argument is to note that Turkey was rated higher before the 1994 crisis than today, which does not make sense. While there is some truth to this argument, the peer relativity idea is useful here: Turkey's peers were also doing very poorly at the time, with Chindia not in the picture yet.
- We also entertained the idea that ratings are not all that important any more. For example, many funds who would not consider taking on Turkey a few years ago now cannot live without us.
- The ex-traders also talked about some technical shit, some of which was beyond me: For example, Turkey's CDS and cash spreads are tight because of technical reasons- to give one, the country's external sovereign debt is relatively very low. Or that repo technicality entered the emerging markets world with Turkey's 11 7/8 2030 sovereign issue- although I have yet to figure what repo technicality is and how it figures in all this:)...
Wednesday, January 19, 2011
As promised, here's my addendum for Monday's Hurriyet column. I will group my points in three main categories: Additional comments on the paper, my comments to a critique of the paper, and my take from the email conversation with my usual gang:
Additional comments on the paper:
Whenever I write about a paper, I do my best to talk with the author(s), and having known and worked with Ozan during my TEPAV days enabled me to track him down quite quickly. Anyway, first of all, I asked him why he concentrated on specific variables. Ozan's response is that he did not want to come up with a model that explains Turkey's ratings; that's more or less what the Citi paper tries to do. Instead, he tries to show that Turkey's investment grade upgrade is not as in the bag as everyone assumes: The indicators that most people use in favor of Turkey's case, such as primary balance and debt to GDP, are not correlated with ratings. On the other hand, Turkey looks quite weak in other indicators that seem to matter to ratings a lot, such as real exchange rate & GDP volatility and interest expenses to tax revenues.
I also had some question marks on Ozan's methodology. To establish a relationship, he does a simple linear regression, controlling for GDP per capita, which proxies for "everything else". I would have opted for a standard ratings regression like the Citi paper. Ozan told me that he did that as well and obtained similar results. He decided to leave those out and go for the simple regression to make the paper accessible to a wider audience.
Suluman the Economist
A certain Suluman who writes in the daily Sabah had a harsh critique of Ozan's paper a few days before my piece.When she first started criticizing me, my perennial spammer revealed she was not very pleased with my "miscellaneous interventions on the daily press". Since then, I have moved those interventions to Twitter, as it mush easier to intervene there. But old habits die hard:
Suluman first notes that CRAs care about the primary balance, not interest expenditures. But as I explained above, Ozan shows that common belief is not true at all. If Suluman had criticized Ozan's empirical methodology, it'd have been OK with me. But to criticize one of the main findings of the paper with the explanation "it's not that way" does not seem like valid criticism to me. Or maybe, he just read the paper the same way Woody Allen had read War and Peace - or War, what is it good for?, as some know it:)....
Suluman then goes on to boldly state that the paper claimsmTurkey's current account deficit stems from government balances. There is no such claim in the paper, just that current account is a sovereign risk. I attribute Suluman's mistake to bad command of English, Turkish or Economics, possibly a combination of at least two of these factors.
I would not have voiced these criticisms, if only Suluman had not concluded his thought-provoking piece (for the lack of thought in it) by accusing TEPAV of trying to affect expectations by spreading false opinions on the Turkish economy (sort of like the "scaring foreign investor away with orders from Dogan headquarters" accusation I often get from my international columns). I could vouch for the invalidity for this statement from personal experience: During my stint at TEPAV, I was not even once asked by anyone to argue a specific opinion in a paper. The director there used to read our papers to make sure we were not using language that could put the institute or its mother TOBB (Business Chambers Association) in a tight spot, but I don't remember being censured, either- just displeased because it would take the director several weeks to get back to us with a short paper).
You don't have to believe me since having worked there, I may not be objective. But anyone who knows the circumstances of my departure from there (and its aftermath) would not dare to question my objectivity regarding this matter. And that's where my advice to Suluman the Economist comes in: It seems that you have some issues with TEPAV. So do I, or at least I used to, until God made its peace with me during the summer:) If you want to get it off your chest, drop me a line and I will invite to this great meyhane in Kurtulus. But don't mix your personal feelings with your columns...
Conversation with my gang
I also had an email conversation thread with my usual gang (two ex-traders, one economist and me) on Monday. We ended up exchanging 27 emails. Here are some good points that came up:
By the way, if you are wondering, what my gang looks like:
If it were up to me, I would let the abi trader be Q7, as he always talks about technical shit I don't understand well, i.e. he is a technical player (sorry for the direct translation from Turkish). I would have the other trader be Almeida, as he is quite large as well. I would have the economist be Fernandes, as he is a gorev adami. And that leaves me with Simao. Not only I love his style of play, his jersey number is also the license plate of my ancestral hometown...