SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 3 AUGUST 2015ANALYST CONTACTSIrina Baron Asst Dir-Research Associate irina.baron@moodys.comXian Li Research Analyst xian.li@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research, Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products. For further detail, please see the last page.Sovereign Risk ReportPolitical Unrest and Potential US Rate Hikes Put Pressure on Turkeys Default Risk Measures Financial markets in Turkey sold off over the past couple of weeks amid political instability and pressure added by an expected rise in US interest rates later this year. The countrys Sovereign EDF' (Expected Default Frequency) 1 metric, which measures the expected probability of default over a one-year time horizon, increased from 0.09% to 0.12% over the past week (see Figure 1) 2 . On July 26, Turkeys ruling Justice and Development Party (AKP), which lost its parliamentary majority in early June, approved a series of air strikes on the Kurdistan Workers Party (PKK) a military force based in northern Iraq. Simultaneously, the country has begun airstrikes against the Islamic State in Syria and allowed the US to use Turkish air bases for additional attacks. Later in the week, Turkish President Recep Tayyip Erdogan announced the end to a cease-fire agreement between the ruling party and the PKK. Critics of Mr. Erdogan view these latest developments as an attempt to sow chaos and regain control in the event of a snap election. Turkeys Borsa Istanbul Stock Exchange National 100 Index, also shown on Figure 1 below, has been volatile since the beginning of this year, and was down 4.1% over the past two weeks. The Turkish Lira, which averaged 1.19 per dollar over the last two decades, reached an all-time low of 2.78 per dollar on July 31.FIGURE 1. BORSA ISTANBUL 100 INDEX VS. TURKEYS ONE-YEAR SOVEREIGN EDF MEASURE (%)MOODY'S ANALYTICS SOVEREIGN AND SUPRANATIONAL2 3 AUGUST 2015 SOVEREIGN RISK REPORT...
