Turkey’s eurobond a boon amid turmoil

ISTANBUL - Reuters

Turkey received a vote of confidence in its underlying economic health Jan. 23, with foreign investors lapping up a $2.5 billion eurobond issue even as a corruption scandal swirled and the central bank intervened to prop up the lira. 

A recent graft investigation has shaken Turkey in recent weeks, helping send the lira into a tailspin and heightening uncertainty ahead of elections this year.

But bond investors looked beyond the immediate turmoil to Turkey’s strong underlying public finances, with the eurobond, priced at 5.85 percent, four times oversubscribed. The country has never defaulted on its foreign debt even in past economic crises and its budget deficit and public debt as a proportion of national output remain well below EU criteria. 

“Turkey had little problem selling its debt but was forced to pay up,” said Nicholas Spiro, head of Spiro Sovereign Strategy in London. “In the current environment, the higher the yield, the more attractive the issue to yield-hungry investors - particularly if it’s a dollar-denominated one in a vulnerable emerging market like Turkey.” 

The issue completes half of Turkey’s planned borrowing for 2014, easing pressure on its finances ahead of a likely destabilising cut in the U.S. monetary stimulus which has flooded emerging markets like Turkey with cheap cash. 

Investors from the United States bought two thirds of the 10-year issue, Turkey’s first outing on a foreign market since the corruption scandal erupted with the detention of businessmen close to the government on Dec. 17. 

Deputy Prime Minister Ali Babacan, who has responsibility for the economy, said the eurobond issue was a sign of confidence in Turkey’s long-term outlook. 

It was priced at 299 basis points over U.S. treasuries, almost double the spread it paid in a similar issue a year earlier, but only 15 basis points over Turkey’s current yield curve. 

“I think the Treasury is eager to get a big deal away to prove that despite all the concern over domestic political tensions, and the pressure on the lira, it is still able to tap international capital markets,” said Timothy Ash, head of emerging markets research at Standard Bank.