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Turkish Assets Jump as Erdogan Tilts Toward NATO Deal

Turkish Assets Jump as Erdogan Tilts Toward NATO Deal
VILNIUS, LITHUANIA - JULY 11: Turkish President Recep Tayyip Erdogan attends the opening high-level session of the 2023 NATO Summit on July 11, 2023 in Vilnius, Lithuania. The summit is bringing together NATO members and partner countries heads of state from July 11-12 to chart the alliance's future, with Sweden's application for membership and Russia's ongoing war in Ukraine as major topics on the summit agenda. (Photo by Sean Gallup/Getty Images)

The cost of insuring Turkey’s bonds against default sunk after President Recep Tayyip Erdogan agreed to stop blocking Sweden’s bid to join the NATO military alliance, reducing geopolitical tensions weighing on the country.

Credit default swaps protecting from non-payment on Turkish bonds for five years fell 26 basis points to 460 points as of 5:06 p.m. in Istanbul, on course for the lowest close in 20 months and down from as high as 700 basis points during Erdogan’s reelection in May. The country’s dollar bonds and local stocks rallied while the lira extended its slide.

“Make no mistake, this is a very big deal for Turkey,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. “Perhaps this is yet another baby step toward Turkey becoming investable once again.”


Perception of Turkish Risks on Decline | Turkey's backing of Swedish NATO bid support optimism for Turkish assets

Geopolitical risks have helped sap demand for Turkish assets as ties between Erdogan and key western allies had been strained by Istanbul’s blockade of Sweden’s membership in NATO and its purchase of a Russian missile system. Since the election, however, Erdogan has been gradually warming relations and rolling back unorthodox economic policies in hopes of luring back foreign capital to rejuvenate the Turkish economy.

“After years of deteriorating relations with the West, it appears that Turkey is finally realizing that closer relations with Russia was not a good look,” BBH’s Thin said.

Turkey Agrees to Back Sweden’s NATO Bid in Boost to Alliance

In another encouraging sign for investors, Erdogan is due to meet US President Joe Biden at a NATO summit in Lithuania in Tuesday, where they’re due to discuss Turkey’s request to purchase F-16 jets.

Turkey’s lira’s traded 0.1% weaker at 26.11 against the dollar, continuing its depreciation since Turkish authorities allowed more currency flexibility in the wake of the ballot, part of its approach of gradually abandoning unorthodox economic policies. The yield on Turkey’s 10-year dollar bond fell 28 basis points to 8.74% while the benchmark Borsa Istanbul Banks Index rose 4.9%

With the country’s foreign currency reserves depleted and with more than $200 billion of debt payments coming due, Erdogan is looking to plug an investment gap. The president will visit United Arab Emirates, Saudi Arabia and Qatar between July 17-19.

Erdogan to Embark on Gulf Tour to Attract Investment to Turkey

Meanwhile, Turkish Treasury & Finance Minister Mehmet Simsek said a rise in central bank reserves in June was “encouraging.”

“The NATO deal, growing reserves, even a gradual shift to orthodox policies and expectations of more money from the Gulf are all aiding the positive sentiment and leading to drop on risk measures,” said Viktor Szabo, an investment director at Abrdn in London.


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