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Turkeys economic repercussions Original Source Link: (May no longer be active)
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Tuesday March 4, 2:52 AM
Turkey's Slap In Face To US Considered Bad Call For Mkt
By Angela Pruitt
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Investors aren't taking too kindly to Turkey's decision to not allow the deployment of U.S. troops on the country's soil, a move analysts equate with the government biting the hand that feeds it.
The surprising parliamentary vote on Saturday spurred a free-fall in the country's assets earlier Monday. Turkish debt plunged five points, while the country's IMKB-100 stock index fell 11% and the currency, the lira, lost 3.3% of its value against the dollar.
Turkey's decision sabotages a multibillion dollar compensation package from the U.S. unless the government changes its stance quickly, observers say.
"Our view is the decision on Saturday is extremely negative," said a London-based analyst, anticipating that Turkey will likely have to bear the costs of a probable Iraq war alone, an undertaking the government isn't well-equipped to handle. "So far (judging) the reaction in both the local and external markets, a lot of people prefer to lock in their profits."
In exchange for allowing in U.S. troops, the U.S. was supposed to reward Turkey with a $6 billion grant, convertible to at least $24 billion in loans. Turkish debt had rallied sharply on the anticipated funding aimed at helping the government cover its financing needs for the year. The government, however, delayed voting on the troop deployment last month, wanting the U.S. to cough up significantly more money not tied to the country's economic reform program with the International Monetary Fund.
Heavily indebted Turkey has been surviving on U.S support and multilateral funding to nourish its fragile economy and to stave off a debt crisis in the aftermath of a financial meltdown in 2001.
"This concern about default risk medium term is still there," said Philip Poole, an analyst at ING Financial Markets, noting investors had put such concerns aside given Turkey's favorable geopolitical standing. "This failure to agree on the support has led investors, not surprisingly, to question that conclusion."
Poole said the country's external debt as a percentage of gross domestic product, which he pegged at 65%, was slightly higher than Argentina's at the time of that country's historic bond default in December 2001.
Turkey's domestic debt amounted to about $92 billion at the end of 2002, while the external debt stood at about $53 billion. An estimated 75% of Turkey's dollar-denominated bonds are held by local banks, companies and retail investors, who have typically supported the market in uncertain times.
Kaushik Rudra, an analyst at Lehman Brothers, said without the argument that the West will remain a staunch supporter of Turkey, local investors might start having doubts about the government's ability to roll over its domestic debt, which could "become self fulfilling."
To reassure financial markets, the government said Monday that it drafted the 2003 budget in line with targets set under its IMF-backed economic plan. The program has been on hold since October 2002 because of Turkey's reluctance to deliver on its commitments.
Some analysts are optimistic that Turkey will be able to salvage negotiations with the U.S. amid speculation the issue of U.S. troop deployment will come up for a second vote as early as this week. The "time line is slipping away. It's not impossible that Turkey and the U.S. can (still) reach an agreement," said ING's Poole.
-By Angela Pruitt, Dow Jones Newswires, 201-938-2269, angela.pruitt@dowjones.com
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Copyright © 2002 Dow Jones & Company Inc. All rights reserved.
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