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    We are not accustomed to this...

    Fatih Özatay, PhD17 January 2012 - Okunma Sayısı: 946

    S&P has cut sovereign ratings of many Eurozone countries. Currently, ratings of three Eurozone countries are lower than that of Turkey.

    The new Spanish prime minister spoke in a party meeting in Malaga one day after the S&P cut the sovereign rating of the country. He said that Spanish people had recently met with concepts like “sovereign rating and risk premium cut/increased” and stressed that his government would survive the country of this odd situation.

    Lately, S&P has cut sovereign ratings of many Eurozone countries. Currently, ratings of three Eurozone countries are lower than that of Turkey. Greece’s rating has been on the floor for a long time. In addition, the ratings of Cyprus and Portugal have recently been cut below that of Turkey. Please not that Turkey’s rating is BB+. Among other countries which faced cuts in their rating are Austria, France, Italy and Spain. Meanwhile, Italy’s rating was cut to BBB+, below the A category. Therefore, Italy became the country with the lowest rating among these four.

    On the other hand, this was a long anticipated development. The cut was not a surprise and thus did not cause of chaos across markets. However, consecutive cuts in the ratings of Eurozone countries and outlook of all but Germany being turned to negative reiterated the severity of the state of affairs across Europe. This obviously is an adverse development for the global economy. 

    The rating of the Stability Fund on the hook as well
    Another adverse effect of the downgrading is that the European Financial Stability Fund (EFSF) which lends to the member states in a harsh condition is also faced with the risk of a rating cut. Because the EFSF makes borrowing providing sovereign bonds as warranty and gives financial support to member states in turmoil. The borrowing cost of the Fund has been moving above that of Germany for a long time. This gap might widen further.

    The EFSF was planned to be replaced with the European Stability Mechanism (ESM) by 2013. The same risks will not hold for the ESM as it will not work under a warranty system and will be based on hot money capital. Therefore, the ESM might be activated earlier.

    What about the implications for Turkey? Before the downgrading, Eurozone countries were expected to contract slightly in 2012. There is not indicator to lower the expectations. Therefore, there will be no additional adverse impact on Turkey’s exports. The main issue that gives way to different growth scenarios for Turkey was uncertainty about the level of funds Turkey could access during 2012. 

    The scenario for 2012 did not change
    European Central Bank (ECB) printed huge amounts of money during December in order to provide banks with low-cost debt with three year maturity, the common view was that foreign fund inflows towards Turkey and peer countries would decrease since European banks were expected to reduce their size in order to fulfill the capital adequacy ratio and repay their due debt.

    The funds provided by the ECB (the bank is expected to repeat this intervention) gave way to another probability: Some analysts argue that this liquidity injected by the ECB might flow towards Turkey and peer countries – at least to some degree – as was witnessed during Fed’s injections back in 2008 and 2009.  If this proves correct, Turkey’s growth rate might fulfill the four percent estimated in the Medium Term Program. If, however, banks tend to downsize their balance sheets – which still is a considerable probability – we might witness a growth rate between 1 and 3 percent, as I argued before.

    Therefore, rating cuts by the S&P did not give new information that would alter our scenarios. In short, there is no need to revise the possible scenarios foe 2012.


    This commentary was published in Radikal daily on 17.01.2012