8/9/2018 Investors Doubt Turkey Will Easily Fall Into IMF Safety Net - WSJ

DOW JONES, A NEWS CORP COMPANY

Cookie Notice
Stoxx 600 388.25 -0.37% ▼ Nikkei 22598.39 -0.20% ▼ U.S. 10 Yr 1 32 Yield 2.964% ▲ Crude Oil 66.69 -0.37% ▼ Euro 1.1577 -0.28% ▼
We use cookies for analytics, advertising and to improve our site. You agree to our use of cookies by
closing
This copy is for your this
personal, message box
non-commercial useor continuing
only. to use our site.copies
To order presentation-ready To ind out more,toincluding
for distribution howclients
your colleagues, to change your visit
or customers
http://www.djreprints.com. settings, see our Cookie Policy
https://www.wsj.com/articles/investors-doubt-turkey-will-easily-fall-into-imf-safety-net-1533740109

MARKETS

Investors Doubt Turkey Will Easily Fall Into

IMF Safety Net
If situation deteriorates, Mr. Erdogan could face few other options than coming to the IMF

By Josh Zumbrun in Washington and Christopher Whittall in London

Aug. 8, 2018 10 55 a.m. ET

As Turkey’s currency plummets, investors are concerned that one much used crash mat may
not be there to break its fall: An IMF bailout.

Since the beginning of last year, the International Monetary Fund has stepped in 16 times with
funding for countries that have spiraling debts or falling currencies, most recently a $50
billion package for Argentina.

The Turkish lira has fallen almost 30% against the dollar this year and yields on its bonds have
risen fast, but investors question whether President  Recep Tayyip Erdogan would ever agree to
the sort of stringent demands that the IMF asks for in exchange for loans.

The IMF said Wednesday that Turkey hasn’t asked for its help. It may never do so. But the idea
that the IMF is there can act as a backstop for the currency and bonds of troubled countries.
Many investors currently don’t see that safety net easily coming together for Turkey, adding to
the pressure on one of the world’s largest emerging markets.

“I think it’s hard to believe that the IMF could help Turkey or for Turkey to ask for the IMF to
help in a balance of payments crisis,” said Luca Sibani, senior portfolio manager at Epsilon SGR.
“This is a further element of vulnerability” for Turkey, he said.

Emerging markets have come under intense pressure amid a strengthening dollar, higher U.S.
interest rates and an escalating trade conflict. That heaped extra strain on Argentine bonds and
the peso earlier this year, but its June IMF’s deal stabilized the country’s markets.

For Turkey, investors worry about President Erdogan’s influence over monetary and

For Turkey, investors worry about President Erdogan’s in luence over monetary and economic policy. PHOTO: CHRIS
MCGRATH GETTY IMAGES

economic policy after he granted himself the right to appoint the central bank’s governors and
named his son-in-law as finance minister.  Investors fear the growing sway of Mr. Erdogan, who
has expressed a preference for lower rates, will discourage the central bank from taming
inflation that hit an annual rate of 15.85% in July.

Turkey is especially vulnerable to falling currency, given the nation’s large pile of foreign-
currency debt. Its external debt stood at 53% of gross domestic product at the end of 2017,
according to the IMF, one of the highest levels among emerging economies. As the lira slides,
that debt becomes more expensive to pay off. What’s more, over a third of that debt comes due
within a year, while 40% is in floating rate debt, making it more expensive to repay as interest
rates rise.

https://www.wsj.com/articles/investors-doubt-turkey-will-easily-fall-into-imf-safety-net-1533740109 1/2
8/9/2018 Investors Doubt Turkey Will Easily Fall Into IMF Safety Net - WSJ
The IMF is likely to see Turkey very differently to Argentina, analysts say. Argentina’s president
Cookie Notice
Mauricio Macri secured a rapid and large bailout in part because he was perceived as trying to
We use cookies for analytics, advertising and to improve our site. You agree to our use of cookies by
return discipline to the country’s economy.
closing this message box or continuing to use our site. To ind out more, including how to change your
settings, see our Cookie Policy

Mr. Macri had already

READ MORE instituted programs to
cut spending and bring
Turkish Lira Falls to Fresh Lows Against U.S. Dollar
Argentina’s fiscal and
Turkish Inflation Accelerates by Less than Expected
current account deficits
U.S. Announces Sanctions on Turkey Officials Over Detention of American Pastor
back under control—the
Erdogan’s Plan to Drive Turkish Monetary Policy Sows Fear Among Investors (May 2018)
sort of steps the IMF
requires with its rescue
programs.

When Mr. Erdogan took office in 2003, Turkey was two years into an IMF bailout plan under
which it was receiving billions of dollars’ worth of loans in exchange for implementing the
fund’s recipe of fiscal and budget rigor.

Although the bailout plan was widely regarded as thrusting Turkey’s economy on a steady
growth track, Mr. Erdogan has consistently minimized the fund’s role, instead crediting his own
stewardship for the recovery.

Having won re-election in late June on the pledge to build a Turkey unbeholden to outside
powers, Mr. Erdogan will be loath to call the IMF to the rescue, analysts say.

“There is no such thing as the IMF on Turkey’s agenda,” a Turkish government official
said Wednesday.

Mr. Erdogan’s combative record with other nations could also work against Turkey. A bailout
needs the support of the IMF executive board which comprises representatives from the
member countries, of which the U.S. has by far the largest voting share.

Last week, Washington imposed sanctions on two Turkish government ministers in response to
Turkey’s detention of an American pastor on terrorism charges that the U.S. say are politically
motivated.

By contrast, President Trump and Argentina’s Macri have a good relationship; Mr. Trump
offered early support for Mr. Macri’s government after currency woes struck.

Still, if Turkey’s situation deteriorates it could face few other options than coming to the IMF.

“No economy can survive 5% plus currency drops a day on a sustained basis,” said Viktor
Szabo, senior investment manager at Aberdeen Standard Life.

“At the end of the day, the IMF might indeed be the only solution, but I still think it will be a
huge (political) uphill battle” for Mr. Erdogan to accept a program, he said.

That makes the situation even more concerning for some investors.

“Turkey is far more important and possibly systemic than Argentina,” said Mark Dowding, co-
head of developed markets at BlueBay Asset Management. “Particularly as IMF support for
Erdogan, if needed, should not be taken for granted.”

—David Gauthier-Villars contributed to this article.

Write to Josh Zumbrun at Josh.Zumbrun@wsj.com and Christopher Whittall at

christopher.whittall@wsj.com

Copyright ©2017 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit
http://www.djreprints.com.

https://www.wsj.com/articles/investors-doubt-turkey-will-easily-fall-into-imf-safety-net-1533740109 2/2