Markets give Turkey thumbs up as credit risk drops to year low

Turkey is experiencing a one-year low in the five-year Credit Default Swap (CDS) at 221 base points, which reflects how markets measure political and economic uncertainty, according to data released by Markit, a leading global provider of financial information services. The decrease indicates that investors recently evaluate Turkey as relatively less risky to make investments, showing a modicum of trust, despite the triple suicide bombing and gun attack at Istanbul's main Atatürk International Airport on June 28, the latest deadly strike to rock Turkey's most-populated city. CDS is basically a financial contract where a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds.

This is achieved by the issuer of the bonds insuring the buyer's potential losses as part of the agreement. The buyer of the CDS makes a series of payments to the seller and in exchange, receives a payoff if the loan defaults. In the event of default the buyer of the CDS receives compensation, and the seller of the CDS takes possession of the defaulted loan.

Also, the buyer of the protection pays a premium to the seller, and this premium is called the CDS spread. The premium is quoted in basis points per year of the contract's notional amount and the payment is made quarterly, where a basis point corresponds to 0.01 percentage point. CDS spreads have a direct proportional relationship with the risk associated by the market and investors to the underlying assets. Markets react to unfavorable news by increasing the spreads and to favorable ones by decreasing the spreads.

CDSs have existed since 1994, and increased in use after 2003. There have been claims that CDSs exacerbated the 2008 global financial crisis by hastening the demise of big companies such as Lehman Brothers and AIG due to their complex structure.