Failed Turkey Coup: More Downside Risk to Credit Ratings

The attempted coup in Turkey has been thwarted and the government has had full control of the situation since Saturday morning. According to Rob Drijkoningen and Gorky Urquieta, Co-Heads of Emerging Market Debt Team at Neuberger Berman, it appears that the military faction that led the attempt was looking to block the expected purge in the judiciary and military of Gulen supporters and other political dissidents.

20.07.2016, 09:20 Uhr

Redaktion: sif

As for political implications, Erdo?an is strengthened to a great extent. Having speculated for years now that there was a coup attempt against him, he is vindicated domestically and internationally. The risk of a referendum or early elections this year is still there but the uncertainty of the outcome of either has dropped, i.e. he should be able to easily win these public votes.

The economy is expected to suffer through a potential decline in foreign investment flows and tourism though should be supported by accommodative monetary and fiscal policies. In the medium term, the Emerging Market Debt Team of Neuberger Bergman would watch what a strengthened presidency means for democracy and EU relations, especially the government's ability to seek consensus with the opposition.

The events introduce more downside risks to credit ratings as well, particularly the Moody's review on August 5, where a downgrade of the current Baa3/Negative (unchanged since Aug-14) rating would singlehandedly push the median rating on Turkish sovereign hard currency debt to junk, as Turkey is already rated BB+/Stable by S&P versus BBB-/Stable by Fitch. Turkish local currency government debt is still rated investment grade by each of the three rating agencies: Baa3/BBB-/BBB. While the immediate economic and political fallout from the events should be contained, the political uncertainty introduced by the coup attempt is the type of medium term risk that rating agencies put significant emphasis on.

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