As I had mentioned in the intro. to this blog, I will be having guest columns here from time to time. Here’s Taylan Bilgic, managing editor at Hurriyet Daily News, explaining the fall in Turkish assets with risk aversion. I have some comments below the column, which was published in Hurriyet Daily Dews a few days ago.

[Complaining of rating firms’ refusal to upgrade Turkey to “investment-grade,” a pro-government columnist said yesterday that the “only” soft underbelly of the Turkish economy was its current account deficit.

As I was reading this, the yield of two-year Greek government bonds surged above a staggering 30 percent, while the spread between 10-year Greek bonds and same maturity German bunds rose to 15 percentage points. This means investors are demanding a 30 percent interest to lend for two years to Athens, and to convince them to buy 10-year Greek bonds instead of the bund, Greece has to pay a 15-percent surcharge.

Can we assume that Turkey will remain unaffected by the turmoil on the other side of the Aegean? We’re not talking about just Greece here, but a whole European Union whose share in Turkish exports is over 40 percent. If Athens defaults on its debt of 330 billion euros, the European Central Bank, Western banks which hold large amounts of Greek debt, other peripheral eurozone members and the euro itself would tremble under the shock.

Until yesterday, one could not see a high possibility of a Greek default being priced into the market – investors assumed that the EU would find a way to rescue Greece. However, as the scope of the problem and the unwillingness of the Greek people to bow to at least a decade of belt-tightening becomes clearer, doubts are emerging.

Timothy Ash, the head of emerging markets research at the Royal Bank of Scotland, puts it elegantly: “There’s a sense that surely, surely, European policy makers have a grip on the issue and that the Greek crisis cannot fall through the cracks. My memories of recent crises – Russia in 1998 and perhaps also Lehman [Brothers] and Bear [Stearns] and others [show] that this is a very brave assumption to make.”

Obviously, that assumption was unraveling yesterday. And what’s at stake is not only Greek bonds, according to Simon Derrick, the chief currency strategist at BNY Mellon.

In a June 14 analysis, Derrick notes that until May, investors who sold Greek assets were buying French and German debt, and the euro. But then, things changed. “The absence of any demand over the past two or three months for German and French debt” has been notable, Derrick said. “Given that ‘safe-haven buying’ of this market had been a defining feature of the previous 15 months, this suggests that a significant change of attitude might be under way.”

We also need to take other factors into account: the discouraging economic data that continues to flow from the United States, warnings over an “overheating” China and the disruptive effects of the March 11 Japanese disaster over the global supply chain.

Thus, it is no surprise that investors are shunning whatever they perceive as risky – Turkish assets being no exception. Let’s take cue from Derrick’s “early May” phrase: Since May 1, the U.S. dollar has gained 6.3 percent against the Turkish lira, while the ISE-100 index fell 13.5 percent. In the same period, the yield of benchmark zero-coupon lira-bond rose from 8.37 percent to 9.08 percent.

There could be more to come, as RBS’s Ash notes that $15 billion of “hot money” has entered Turkey over the past four to five months.

It is futile to complain about rating agencies in such an environment. A debate on why Turkey’s economic growth remains bound to inflows of hot money and the mercy of long-discredited ratings firms would be more appropriate.]

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