Expectations of $30 billion from standby

Bloomberg

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The Turkish government may sign an agreement worth at least $30 billion with the International Monetary Fund, or IMF, helping extend the credit-market rally, said Bank of America-Merrill Lynch.

"We think the IMF program might surprise on the positive side," Benoit Anne, an emerging-markets currency strategist at the bank who worked at the IMF as an economist, said in a telephone interview Friday. "Turkey might even be eligible for a flexible credit line," he said, referring to the new form of funding for countries with sound public finances.

Speculation that Turkey will sign a new stanby has helped drive down the cost of buying protection against a default to an 11-month low. Turkey’s five-year credit-default swaps dropped to 268 basis points Friday from a high this year of 521.51 basis points on March 2, according to prices from CMA Datavision.

Turkey has been negotiating an IMF deal for the past year as the economy sank into its first recession since 2001. The government needs funds to help pay off debt as the slowdown eats into tax revenue. The economy shrank 6.2 percent in the fourth quarter.

A deal with Turkey may be signed within "weeks," IMF Managing Director Dominique Strauss-Kahn said on April 17. Turkey will sign a deal only if it’s in the country’s interests to do so, Prime Minister Recep Tayyip Erdoğan said on April 3.

"It’s natural to doubt they may delay the IMF accord further and Turkey has shown this tendency whenever things are good, but I think it would be dangerous for Turkey and a mistake to decide not to go with an IMF deal," said Beat Siegenthaler, emerging-markets chief strategist at TD Securities in London, in a telephone interview. "Turkey still needs an IMF anchor in terms of keeping market confidence in economic policies."

Turkey’s external-financing needs are diminishing as the current-account deficit narrows, Central Bank Governor Durmuş Yılmaz said on April 30. They are now "much less" than a previous central-bank estimate of $30 billion, he said.

The budget deficit in the first quarter was 19.1 billion liras ($12.2 billion), almost double the original target for the year and about 40 percent of the revised goal of 48 billion liras. "The macro picture continues to show external-sector vulnerability and large financing requirements, and in the context of a still uncertain market you need the credibility of an IMF program," Bank of America-Merrill Lynch’s Anne said.

The decline in Turkey’s credit-default swaps raises questions about the need for a lending accord with the IMF, said Timothy Ash, head of emerging-market economics at Royal Bank of Scotland last week.

"The obvious question from Turkey’s point of view is why move early to close an IMF deal with five-year Turkey CDS now inside its pre-Lehman level," Ash said in an e-mailed report to clients. "It would be unlikely to make much difference in terms of Turkey’s actual borrowing costs."

Turkish CDS traded at 276 basis points on Sept. 11 before the collapse of Lehman Brothers Holdings.

Meanwhile, the IMF accord might be of between $25 billion and $30 billion, JPMorgan Chase economist Yarkın Cebeci said in a televised interview with CNBC-e news channel. Turkey does not require a loan of $40 billion to $50 billion, as some investors are expecting, Cebeci said in the interview Friday.