Another downgrading from US ratings agency Standard & Poor's (S&P) on 28 April has inflicted a further blow on the financial markets. The downgrading came a day before the arrival of an IMF team to discuss the government's application for a $1,200 million standby facility (MEED 6:5:94).

The agency downgraded long-term currency debt to B-plus from the BB rating it set in March (MEED 1:4:94). About $2,700 million of foreign debt is affected. Along with the republic, the state Ziraat Bankasi (Agricultural Bank), Ankara municipality and the Istanbul Water & Sewerage Administration are also downgraded.

The downgrading and continuing review for potential downgrading reflects intensifying external liquidity and balance of payments pressures, said S&P. It noted that foreign exchange reserves are falling, and the likelihood is fading that the government's 5 April package aimed at fiscal stabilisation will re-establish confidence. The agency also cited concern about potential difficulties with the government's ambitious privatisation programme.

Although the downgrading had been expected, the Istanbul stock exchange index and the exchange rate fell on 29 April. The central bank once again stepped in with high overnight borrowing rates of 400 per cent annualised in the interbank markets to boost the lira. In the foreign exchange crisis, the lira has lost about 56 per cent of its value against the dollar since the start of 1994.

The crisis in the banking sector has not been helped by the treasury's recent banning from further trading of three small institutions (MEED 6:5:94). Foreign banks are seeking treasury cover for loan losses from the closures. Marmara Bank, Turkish Import & Export Bank (Impex) and TYT Bank face liquidation after failing to meet their obligations. They had combined foreign debts valued at $320 million and foreign risk exposures of around $200 million at end-1993, according to official figures.

Union Bank of Switzerland (UBS) wrote to the treasury and central bank in the week ending 29 April, urging them to shoulder the foreign debts of the three institutions. Government sources say the treasury is considering doing so if it can arrange some form of domestic debt rescheduling.

Although the treasury is not legally obliged to compensate foreign banks for their Turkish loan losses, in this case it may be anxious to avoid any further tarnishing of Turkey's financial credibility. Foreign banks generally are closing lines to Turkish institutions, or asking interest rates of around 8 per cent over the London interbank offered rate (Libor), according to market sources.

Bankers say several other banks could find themselves in serious difficulties, including perhaps one large retail institution. This is despite additional powers of assistance for the central bank in a hasty amendment to a new law making the central bank gradually more autonomous.

The supervisory Capital Markets Board (CMB) in Ankara has also moved against brokerage houses on grounds including alleged irregularities in repurchase transactions. The houses include the leading firm AOG Turkinvest. Along with eight others, it has been barred from trading for a month while the CMB carries out its investigations.