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Will US court’s Argentina verdict impact Turkey?

Argentina's recently declared bankruptcy may set a risky precedent for high-debt countries like Turkey.
Turkey's Central Bank headquarters is seen in Ankara January 24, 2014. Turkey received a vote of confidence in its underlying economic health on Thursday, 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. The graft investigation, one of the biggest threats to Prime Minister Tayyip Erdogan's 11-year rule, has shaken Turkey in recent weeks, helping send the lira into a tailspin and heightening uncertainty a

At the end of July, Argentinian Economy Minister Axel Kicillof appeared on TV in New York and declared bankruptcy for his country, sending US markets into turmoil.

How did this unexpected bankruptcy come about? In 2001, when Argentina could not pay its debts, it borrowed heavily from US hedge funds to cope with the crisis. Now, it couldn’t repay on time its $1.33 billion debt in bonds and called for a rescheduling of its payments.

Meanwhile, the issue was taken to a local US court, which decided that the debt payments could be postponed if the hedge funds agree to it. But the funds did not agree, and called for immediate payments. The court then decided the debts must be paid by July 30. In a press conference a few hours before the deadline, the Argentinian economy minister said, “The vulture funds decided not to wait. We couldn’t reach an agreement, hence our declaration of bankruptcy.”

Standard & Poor's reacted by lowering Argentina’s grade to “selective default,” which is assigned to countries that default on repayment of loans and their interest. The latest lowering of the grade to bankruptcy happened to Greece in 2011.

The judgment by the US court means that the $1.33 billion debt cannot be postponed without permission and must be paid back as scheduled unless the lending funds give their consent. It was also decided that Argentina could not pay off its newer bonds before repaying the older debt. The court decision was appealed at a higher court, but was rejected. Argentina was not allowed to pay back the bond interests of $539 million for its newer debts and the country thus defaulted for the second time in 13 years. According to the court, Argentina cannot sell new bonds on the US market before clearing its old debt.

Can the decision affect Turkey?

Many renowned economists, including Robert Solow, Branko Milanovic and Dani Rodrick, called on the US Congress to devise legislative measures to nullify the court’s Argentina decision. They said that unless this is done, the judgment by the local court will disrupt the financial system and put countries with high debt at risk.

Turkish economists Korkut Boratav and Erinc Yeldan warned that the Argentina verdict could set a precedent for other countries in heavy debt. Yeldan, of Bilkent University, offered this analysis to Hurriyet: "In high-debt countries like Turkey, sometimes difficulties are encountered financing the current deficit. These countries may need to borrow more and therefore seek rescheduling of their debt repayments. With this decision, such rescheduling is going to be risky because the creditors might get up and say, ‘Pay them back all at once.’”

Yeldan recalled that in 2006, Turkey had problems paying back its debts to the International Monetary Fund (IMF) and payment was rescheduled to 2010. "We will not have any such facility from now on,” he said.

But officials with Turkey’s Economy Ministry, reacting to the warning of the economists, said that Turkey’s current deficit and its strength in exports, growth and the ratio of its foreign debt to gross domestic product cannot be compared with the weaknesses of Argentina and therefore, Turkey won’t be affected by this decision.

Storm warning

Faik Oztrak, deputy chairman of the main opposition Republican Peoples Party and the former underscretary of the treasury, disagrees. He said in the coming five years, the global economy will be less accommodating for developing countries like Turkey than it was in the last five years. This was his assessment to Al-Monitor:

“Argentina’s inability to pay its debts at such a critical period must concern Turkey closely. In recent IMF reports, economies with high inflation and high foreign debts are described as the fragile economies of the new economic climate. Turkey is among these fragile economies, along with Argentina. We understand that we have not made any true progress. Lagging behind in making structural reforms that will lower the current deficit and boost our competitive strength, constant changes in the balance of public finance and attacks on the independent institutions that had contribute to Turkey’s resilience will all create major risks for Turkey. To avoid another … trauma next year, we have to make best use of the limited time we have. If we can’t set our own home in order, the wind outside could turn to a storm inside.”

Should we worry about possibility of bankruptcy for Turkey, then? The answer came from Moody’s this month. It listed 10 countries in danger of bankruptcy: Equator, Egypt, Pakistan, Venezuela, Belize, Cuba, Cyprus, Greece, Jamaica and Ukraine.

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