Turkey continues to struggle with a severe economic crisis. Reportedly, the Turkish economy is on the verge of default amid the country’s credit default swaps (CDS) hike. A credit default swap is insurance against a debt default. The buyer compensates the seller in the event of insolvency of the borrower, and the buyer can expect the debt to be repaid. In addition, these swaps can be sold to a third party not acting as a borrower on the underlying debt. Currently, Turkey’s default swaps reach 837 basis points (8.7%). The buyers will have to make yearly payments until the end of the swaps. Notably, this figure is above the highest level last seen 19 years ago. Meanwhile, investors are concerned about skyrocketing inflation, soaring above 70% on a yearly basis. In addition, the lira has lost 23% since the beginning of the year. President Recep Tayyip Erdogan relies on unorthodox monetary policy tools aimed to curb inflation by decreasing the key rate. This approach, as well as lower yields on Turkey’s debt securities, makes investors worry.
