The writer is chief investment officer of emerging market debt at FIM Partners
Debt and currency investors went into the Turkish elections pricing in a high chance of an opposition victory in the first round. Such victory was meant to bring about a return to economic orthodoxy even if it was understood that the macro challenges ahead were monumental and opposition unity was anything but guaranteed.
Five-year credit default swaps — a kind of insurance instrument to hedge against debt default — for Turkey had rallied, falling 70 basis points to 480bp going into the election last week. And investors had been buying the external bonds ahead of the event. Local currency bonds were pricing in large rate rises in anticipation of an opposition-controlled central bank that would be more responsive to inflationary challenges.