(Bloomberg) -- For Turkish sovereign and corporate debt, Monday's emergency measures to tackle the lira's meltdown have come too late to rescue a painful 2021.
Investors have lost 7.8% on the country's dollar-denominated sovereign debt this year, compared to 2.9% across emerging markets in the worst performance since 2013. Meanwhile, corporate debt holders have lost 1.7%, the sixth-most globally, according to Bloomberg indexes.
The lira rallied more than 30% in three days after the rescue plan promised investors protection from its wild swings, with the government pledging to pay holders of lira deposits the difference if drops against hard currencies exceed bank interest rates. While the currency got a boost, the proposal's not much help in reversing debt holders losses and risks piling further pressure on state finances.
“I don't expect we will see a huge rebound until year-end in Turkish credit, since it will definitely need almost a U-turn and admission that previous policy was wrong -- very unlikely in my view,” said Sergey Dergachev, senior portfolio manager and head of emerging market corporate debt at Union Investment Privatfonds in Frankfurt. In this illiquid and nervous market “every headline from Erdogan and his team could lead to stronger volatility,” he said.
How Erdogan's Plan to Halt the Lira's Fall Is Meant to Work
The average risk premium for holding Turkish corporate debt widened on Monday to the highest since August 2020. Two local corporate bonds are trading in distressed territory, where investors demand at least 1,000 basis points over the U.S. Treasuries: renewable energy company Aydem Yenilenebilir Enerji A.S.'s $750 million bonds maturing February 2027 and $500 million of subordinated debt with a June 2028 maturity from lender Turkiye Is Bankasi AS.
“We might see a bounce as the market is incredibly illiquid, but ultimately what's going to save them is a return to orthodoxy or the engagement of an external balance sheet, read the IMF,” said Francesc Balcells, London-based chief investment officer of emerging-market debt at FIM Partners.
Lira's Wild Ride Eclipses Rates as No. 1 Threat to Turkish Firms
“It's just a reshuffling of the liabilities from foreign currency to local currency, but at the end of the day, what people need and want is hard currency,” said Balcells.
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