Turkish lira crisis starts to hit other emerging markets

The Turkish lira fell further on Monday despite central bank moves to shore up the financial system, as President Recep Tayyip Erdogan lashed out at economic “traitors” and accused the US of stabbing the country “in the back”.

The beleaguered currency slid as much as 11 per cent to a record low of TL7.2362 against the US dollar in Asian trading, before rallying to trade about 8 per cent down. Turkish stocks were also hit, with the benchmark BIST 100 index falling 2.4 per cent.

The lira has been rocked by a bitter dispute between Ankara and Washington, which has added to concerns about Turkey’s high inflation and its hefty current account deficit, as well as Turkish corporates’ foreign currency debt and the direction of economic policy under Mr Erdogan.

The currency has lost 24 per cent of its value against the dollar since August 6, and 46 per cent so far this year.

Amid signs of contagion, the Turkish turmoil hit other emerging market bonds, stocks and currencies as analysts warned that the severity of the crisis was starting to infect other nations.


JPMorgan’s EM foreign exchange index tumbled 1.7 per cent to a record low, with every major EM currency falling against the US dollar. Argentina’s central bank unexpectedly lifted its main interest rate by 5 percentage points to 45 per cent, after the peso slid for a sixth day running to a new low against the dollar.

South Africa’s rand briefly fell as much as 10 per cent on Monday to a two-year low. It was the currency’s biggest one-day drop in a decade. It later rallied to trade 2 per cent lower. The Indian rupee slipped 1.1 per cent, while the Indonesian rupiah lost 1 per cent.

“The fear is what happens in Turkey won’t stay in Turkey,” said Katie Nixon, head of investment at Northern Trust’s wealth management arm.

European financial stocks also came under pressure. Spain’s BBVA shed 3.2 per cent, while Italy’s UniCredit sank 2.6 per cent. Both banks own stakes in Turkish lenders.

In a sign of the downturn in US-Turkish ties, Mr Erdogan hit out at Washington, which had imposed sanctions on two of his cabinet ministers over Ankara’s detention of an evangelical pastor from North Carolina.

“We are together in Nato and then you seek to stab your strategic partner in the back,” the Turkish president said in a speech on Monday. “You fire bullets into the foot of your strategic partner.”

“The current level of the exchange rate has no economic foundation,” Mr Erdogan said, as he threatened to punish “traitors” for spreading rumours of capital controls. “Turkey has strong economic fundamentals and it will continue being robust.”

In line with Mr Erdogan’s warnings, the chief prosecutor of Istanbul opened an investigation into “persons who are involved in actions that threaten social peace, domestic calm and unity and confidence in the economy” with manipulative news and statements, the state-run Anadolu Agency reported.

CNN Turk, a local broadcaster, said the interior ministry had opened a probe into 346 social media accounts after determining they had engaged in “provocative posts to shape perceptions”.

Mr Erdogan, who has attributed the lira’s travails to a foreign “operation” and an “economic war” against Ankara, said the finance ministry and other authorities were taking the necessary steps “in the face of these attacks”.

Analysts warned over the weekend that Turkey needed a drastic interest rate rise accompanied by a detailed plan to restore investor confidence. Instead, Turkish institutions announced a series of technical measures that briefly pulled the lira towards TL6.5 to the dollar before it slid downwards again.

The central bank said cuts in so-called reserve requirement ratios, a capital buffer for banks, would free up as much as TL10bn ($1.4bn), 6bn in US dollars and the equivalent of $3bn in gold to be released into the financial system.

A person familiar with the matter said the central bank was preparing to lend money at an overnight rate above the benchmark “repo” rate of 17.5 per cent — a move that would represent a de facto tightening of monetary policy. Reuters reported earlier on Monday that the bank was willing to provide lira liquidity at 19.25 per cent after opting not to hold its regular repo auction for the day.

But there was no sign of a big interest rate increase, a move Mr Erdogan steadfastly opposes.

In an interview with the Turkish newspaper Hurriyet published on Sunday, Berat Albayrak, finance minister, dismissed the rumours that Ankara could impose capital controls with a promise that Turkey would not convert or seize foreign currency deposits. Mr Albayrak, who is also Mr Erdogan’s son-in-law, said the government could implement a fiscal rule, which would constrain government spending “if necessary”.


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