A Measure of Turkey's Sovereign and Banking Sector Credit Risk: Asset Swap Spreads

The existence of the credit derivatives written on the eurobonds such as credit default swaps or asset swaps allows policymakers and investors to monitor the credit risk of the reference entities over time. However, credit derivatives are mainly available for the reference entities in advanced economies with high liquidity and a wide maturity spectrum whereas the market for credit derivatives in emerging market countries, Turkey in particular, is limited in terms of entities and maturities. In this regard, this study aims to obtain a proxy for the credit risk of Turkish Treasury and banking sectors in international markets by calculating asset swap spread for US dollar denominated fixed coupon Eurobonds, which requires a robust estimation of the respective yield curves that has not been presented before. The study firstly presents the estimation of sovereign and banking sector yield curves and then constructs a synthetic asset swap structure to obtain embedded credit risk premia in these eurobond curves. The proposed credit risk indicator is robust in terms of its high correlation with credit default swap premium. Besides, estimated eurobond curves are also useful for monitoring borrowing cost dynamics of Turkish Treasury and banking sector in international markets instantaneously from a comparative perspective.