24/7 Wall St.

Against the backdrop of a trade war with the United States and a crumbling economy, Moody’s has downgraded the rating of Turkey’s sovereign paper from Ba3 from Ba2 and changed its rating outlook to negative. The rating is a warning that investment in the debt comes with extreme risks.

Moody’s gave the reason:

The key driver for today’s downgrade is the continuing weakening of Turkey’s public institutions and the related reduction in the predictability of Turkish policy making. That weakening is exemplified by heightened concerns over the independence of the central bank, and by the lack of a clear and credible plan to address the underlying causes of the recent financial distress, notwithstanding recent statements by the government. The tighter financial conditions and weaker exchange rate, associated with high and rising external financing risks, are likely to fuel inflation further and undermine growth, and the risk of a balance of payments crisis continues to rise.

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The nation is run by the dictator Recep Tayyip Erdoğan, who is called the nation’s president. He has held the job since 2014.

The value of the nation’s currency, the lira, has plunged. Inflation is rampant. The instability of the debt problem has made borrowing difficult.

There is ongoing worry that a default of Turkey’s debt could hit the balance sheets of EU-based banks.

The IMF’s economists recently wrote:

Monetary policy appears too loose and its credibility is low; and on- and off-budget fiscal policies (including credit guarantee schemes and PPP activities) are expansionary and risk undermining Turkey’s hard-earned fiscal credibility. As a result, the economy faces internal and external imbalances: a positive output gap, inflation well above target, and a current account deficit of more than 5 percent of GDP. Meanwhile, political uncertainty and regional instability remain elevated, and the integration of the many refugees poses challenges.