One of the reasons why I decided to submit the Turkish sovereign ratings article to Seeking Alpha six months ago was that some analysts were coming out with wrong numbers and serious misinformation about Turkish economy at the time. Some claimed that Turkey needed to the tune of 150 billion dollars of external financing, numbers that had no basis in fact.

I believe that the Turkish economy faces various risks and I’ve been vocal about them. However, I am of the opinion that Turkey has historically gotten (and still gets) a lower rating than it deserves from credit rating agencies. I’m not going to go into a lot of detail as to why I think so, but you could get a clue into my line of thinking here.

The Turkish Central Bank finally gets the idea that if central banks around the world are busy aggressively cutting rates, you should probably be doing something as well.

Can we properly measure individual country risks? Or, has the country risk become less important given the global roller coaster nature of the financial markets?

The Turkish Central Bank has also announced a cut in the borrowing rate by 50 basis points, citing slower than expected growth as well as decreasing inflationary pressures.

The article expends some generic language on how the Turkish economy has been influenced negatively by the current global crisis and how the country may be vulnerable to a crisis that several other countries are already facing. So after six years of non-stop growth, the Turkish stock market, its currency as well as the growth rate have finally taken a hit. The article is quick to point out that Turkish economy has done well after the last intervention by the IMF during the crisis of 2001. The article, unsurprisingly, assumes that IMF is responsible for the successful growth registered by Turkey (as opposed giving due credit to the “hot” money flow into emerging markets during this time period causing littler bubbles in their domestic scenes, for instance) and further elaborates that Turkish economy does well in the presence of “external anchors”.

First, I would like to make a civil statement due to hypocritical attitudes of certain European deputies who won’t miss an opportunity to criticize Turkey. The alleged concern here is that the Turkish Judiciary is “overstepping” into the Turkish political process.

China receives most of the blame for global trade imbalances, but other exporters have also attracted global attention in this matter. However, the yuan is especially undervalued, and revaluing the currency could seriously undermine China’s competitive edge in the global markets. That’s why China does not do it, and trying to convince them to revalue has so far been a futile exercise in lobbying.

This is most apparent in “extreme event” scenarios that involve natural disasters. What if an earthquake with a severe magnitude damaged electricity systems and power gridlines, which in turn caused fire in addition to the earthquake disaster? Imagine seismic waves in the immediate aftermath causing disruption of water and sea levels, hence creating tsunami waves on top of everything else. Add a final insult to the injury in the form of riots and looting that result from the dissolution of a Hobbesian-style “social contract society”.

These other assets may include buying protection in the form of derivatives or being equally invested in bonds, however both come with costs. Assuming that our buy and hold investor is not in the business of timing the market, he or she will have to pay significant premiums for buying protection in the form of derivatives. Or the investor will have to let go of the higher long-term excepted returns of more volatile assets if he or she wishes to be equally invested in bonds.

I may have been quick to judge that “there is a severe lack of understanding by international investors of the dynamics that shape the Turkish economy and its financial landscape”. It seems that at least a London-based newsletter, Emerging Markets Monitor, has good insight into the dynamics of the Turkish markets as they elaborate on their former bullish recommendation:

Our short-term bullish view of the Turkish lira continues to play out. Having first promoted potential upside in late June (2006) around the TRY1.5800/US$ area, the currency has appreciated by some 5.8% to its present (August) level of TRY1.4480/US$, in addition to over five weeks of superb carry. With overnight rates trading above 17.50%, and potentially heading a little higher over coming weeks as the central bank acts to cap inflation, the carry is the most attractive in town…

International liquidity flows are the most important determinant factors in the pricing the Turkish markets and currency, thus the domestic markets follow rise-and-fall movements dependent on the liquidity-in, liquidity-out policies of macro funds. The market is a lot more reminiscent of the day-trading of U.S. stocks, for five minutes to an hour, which usually follow the buy or sell decisions of the “big guys” (mutual funds, hedge funds). But for U.S. stocks at least, we can be sure that fundamentals will prevail in the longer run, thus we can make decisions based on those fundamentals as we see fit.