US rating agency Standard & Poor's (S&P) has downgraded Turkish long- term foreign currency debt for the second time in 1994. The move takes the country's credit below investment grade and compounds market fears over the economic and political situation.

S&P on 22 March downgraded the debt to a BB rating, from BBB minus. It says it has put Turkey on credit watch status and would consider another downgrade if a workable fiscal programme could not be implemented.

Other agencies are adopting a less dramatic approach. Moody's Investor Service says Turkey's rating remains at Ba1, the grade decided on 13 January. This rating is not under review, Moody's says. Japan Credit Rating Agency has kept Turkey at BBB-minus, but with credit monitor status.

The downgrade affects only about $2,700 million of the country's estimated $64,000 million external debt, but has wider effects on investor confidence.

Reports that the Treasury nearly defaulted on lira-denominated bonds worth about $415 million issued by the Public Participation Administration (PPA) have also caused widespread concern. After the Treasury refused to provide finance, the PPA had to raise the finance in the interbank market.

Trade financiers and credit insurers are concerned that payments delays could build up and bankers say they are reluctant to provide any new credit.

S&P's downgrading added to general gloom over the economy's prospects and the 69-share index fell 1,251 points to 13,588 on 23 March, Reuters reports.

The central bank moved to protect the lira by raising its overnight borrowing rate to 500 per cent from 440 per cent. The currency has lost one-third of its dollar value since 1 January. Interest rates are expected to fall after the local elections on 27 March, easing pressure on local industry.

The crisis could lead to a reversal of liberalisation policies. Reuters quoted Sadik Can Ipek, chief dealer at brokers Garanti, saying 'The government may bring restrictions on foreign currency transfers or introduce new import regulations.'

President Demirel has played down the crisis. On 22 March he told the Foreign Press Association of Turkey that 'Turkey has a money crisis, and this is only temporary. It does not have any structural discomforts. The country's leaders know what needs to be done.'