Moody’s has placed on review for downgrade the covered bonds of six Turkish banks – including the rating of the country’s sole euro benchmark, from VakıfBank – after putting the sovereign’s ratings on review, reflecting its expectation that investor confidence in Turkey could continue to erode.

Moody’s placed Turkey’s Ba2 ratings on review for downgrade last Friday, stating that it expects that a recent erosion in investor confidence in Turkey to continue if not addressed through credible policies following the country’s general elections, which are due to be held on 24 June. This could lead to “a sustained increase in the probability and proximity of severe balance of payments constraints”, said Moody’s.

It has already downgraded Turkey once this year, from Baa1 to Baa2 in March.

After placing the country’s ratings on review for downgrade, Moody’s yesterday (Thursday) took similar rating actions on a range of Turkish financial institutions, including downgrading the counterparty risk (CR) assessments of some covered bond-issuing banks and placing the CR assessments of others on review for downgrade.

Moody’s then placed the Baa2 covered bond ratings of Akbank, Garanti Bank, Şekerbank, VakıfBank, Yapı Kredi and İşbank on review for downgrade.

The covered bond ratings of those issuers whose CR assessments were downgraded were not downgraded because they remain consistent with the current ratings from both an expected loss and a Timely Payment Indicator (TPI) framework perspective. But Moody’s said that any further downgrade of the CR assessments of these issuing banks would negatively affect the covered bonds due to the effect on the expected loss method and the maximum rating uplift that covered bonds may achieve over the CR Assessment following the application of the TPI framework.

The covered bond ratings are currently capped at the Baa2 local country ceiling of Turkey. In the event of a downgrade of the Turkish sovereign rating, the Turkish country ceiling could be lowered, noted Moody’s. It said the covered bonds would subsequently adjust to the new ceiling level, if lowered.

VakıfBank sold the first and to date only euro-denominated benchmark covered bond out of Turkey, a EUR500m five year mortgage-backed issue, in April 2016.