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Turkish lira crisis: euro plunges as currency volatility sparks contagion fear Turkish lira crisis: central bank action fails to quell contagion fears
(about 2 hours later)
The Turkish lira fell almost 9% in early trading on Monday and the euro hit a one-year low as investors feared that the country’s financial crisis could spread to European markets. Turkey’s central bank has acted to stem the lira’s crash, but the intervention was not enough to quell investors’ fears that the country’s financial crisis could spread to European markets.
Despite defiant words by the Turkish president Recep Tayyip Erdoğan over the weekend pledging as yet unspecified action to reverse the slide, the currency slipped alarmingly against the US dollar on Monday. The lira pulled back from from a fresh record low overnight but was still trading steeply lower at nearly 7% down against the dollar on Monday morning. The euro was also trading at a one-year low.
In early trading it reached an all-time low of 7.24 before bouncing back after the country’s banking regulator announced late on Sunday night that it would limit the ability of Turkish banks to swap the battered lira for foreign currency. The lira’s performance continued to underwhelm despite the central bank pledging to provide liquidity and cut lira and foreign currency reserve requirements – a cash buffer – for Turkish banks.
Asian stock markets were also down on Monday. The Nikkei in Japan lost 1.7%, Hong Kong was off 1.8%, Shanghai -1.7%, Sydney -0.5% and the Taiwanese bourse fell 3%. Turkey’s central bank said: “[We] will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary.”
The FTSE100 was expected to open down 0.4% later on Monday morning while Germany’s Dax 30 was set for a 0.65% fall. The Ankara-based bank pledged to provide “all the liquidity the banks need”.
The euro dropped 0.3% to a one-year low against the US dollar on Monday as the falling lira fuelled demand for safe havens, including the greenback, Swiss franc and yen. The Vix volatility index measuring turbulence in financial markets – also known as the fear index – jumped 16% on Monday. However, it has not raised interest rates, which some economists argue is necessary to alleviate the crisis because it will curb inflation and deter investors from selling the lira. However, the Turkish president, Recep Tayyip Erdoğan, has warned against raising borrowing costs.
There was also concern that other emerging market currencies – already under pressure from the rising US dollar – could be dragged into the lira’s downward spiral. The South African rand hit a low level not seen since mid-2016, the Russian rouble slumped again and the Indian rupee slid to an all-time trough. The Turkish finance minister, Berat Albayrak, who is Erdoğan’s son-in-law, said at the weekend that authorities would start implementing an economic action plan on Monday morning.
He rejected capital controls as an option to stem outflows of hard currency.
Investors are concerned about the exposure of European banks including Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas, which have big operations in Turkey. European bank shares dropped 2% in early trading on Monday. The FTSE 100 was down nearly 0.5% on Monday morning, with Germany’s Dax down 0.7% and the CAC in Paris down 0.4%.
The Turkish stock market lost 2.5%, with nearly every share down. The Russian rouble, Australian dollar, South African rand, and the Mexican and Argentine peso – other emerging currencies that could be at risk – also fell.
Turkey’s banking regulator announced late on Sunday night that it would limit the ability of the country’s banks to swap the lira for foreign currency.
Connor Campbell, a financial analyst at trading platform Spreadex, said: “One of the key sticking points is the intransigence from President Erdoğan – whose appointment of his son-in-law as minister of finance and Treasury has cast doubt on the independence of the Turkish central bank – over keeping interest rates unchanged despite eye-wateringly high inflation and the lira’s heavy losses.
“That means the various non-rate hike measures announced on Monday to stabilise the currency – including the promise to provide ‘all the liquidity the banks need’ – will likely be limited in their effect.”
Asian stock markets were down on Monday. The Nikkei in Japan lost 1.7%, Hong Kong was off 1.8%, Shanghai fell 1.7%, Sydney dropped 0.5% and the Taiwanese bourse lost 3%.
The falling lira fuelled demand for safe havens, including the greenback, Swiss franc and yen. The Vix volatility index measuring turbulence in financial markets – also known as the fear index – jumped 16%.
The lira has tumbled more than 40% this year on worries about Erdoğan’s increasing control over the economy and deteriorating relations with the United States, chiefly over the war in Syria.The lira has tumbled more than 40% this year on worries about Erdoğan’s increasing control over the economy and deteriorating relations with the United States, chiefly over the war in Syria.
A decision by a Turkish court to extend the detention of Andrew Brunson, an American pastor accused of espionage for Kurdish militants and the Gülen movement, a group accused of masterminding the 2016 coup, forced the issue into the open with Donald Trump responding last week by doubling US tariffs on Turkish steel. A decision by a Turkish court to extend the detention of Andrew Brunson, an American pastor accused of espionage for Kurdish militants, and the Gülen movement, a group accused of masterminding the 2016 coup, forced the issue into the open, with Donald Trump responding last week by doubling US tariffs on Turkish steel.
Chris Weston, of online trading firm IG Market in Melbourne, warned that global markets would be on edge as investors tried to assess the impact of the crisis on European banks which have lent money to Turkey. While the Trump row helped trigger a run on the lira last week that continued on Monday, the market moves against the Turkish currency reflect deeper problems for one of the world’s largest emerging economies. Turkish companies have made significant borrowings, including large amounts in dollars, and have raised $220bn (£172bn) in debt – which has become more expensive to repay as the lira has fallen.The central bank is under pressure to increase borrowing costs – despite Erdogan’s misgivings – as a countermeasure against rising inflation and capital flight. But economists warn this could also push Turkey into a recession.
Chris Weston, of online trading firm IG Market in Melbourne, warned that global markets would be on edge as investors tried to assess the impact of the crisis on European banks that have lent money to Turkey.
“The European Union’s financial watchdog [has] expressed concern about EU financial exposures to Turkey. And so, if it is a concern for this institution, then it should be for traders too,” he said.“The European Union’s financial watchdog [has] expressed concern about EU financial exposures to Turkey. And so, if it is a concern for this institution, then it should be for traders too,” he said.
Analysts at ANZ bank in Australia said contagion risks centre on Spanish, Italian and French banks exposed to Turkish debt, as well as Argentina and South Africa.Analysts at ANZ bank in Australia said contagion risks centre on Spanish, Italian and French banks exposed to Turkish debt, as well as Argentina and South Africa.
“Turkey’s massive pile of corporate debt denominated in foreign currencies, but a rapidly sliding currency – and inflation that’s threatening to go exponential – is a toxic combination.”“Turkey’s massive pile of corporate debt denominated in foreign currencies, but a rapidly sliding currency – and inflation that’s threatening to go exponential – is a toxic combination.”
country exposure to #Turkey debt -BIS#TurkeyCrisis pic.twitter.com/lJQBYsQepbcountry exposure to #Turkey debt -BIS#TurkeyCrisis pic.twitter.com/lJQBYsQepb
Andrew Kenningham, chief global economist at Capital Economics, said: “The plunge in the lira which began in May now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis. Andrew Kenningham, the chief global economist at Capital Economics, said: “The plunge in the lira which began in May, now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis.
“This would be another blow for emerging markets as an asset class, but the wider economic spillovers should be fairly modest, even for the euro zone,” he added. “This would be another blow for emerging markets as an asset class, but the wider economic spillovers should be fairly modest, even for the eurozone.”
#EXPOSED: #Erdogan is a 'Snake Oil Salesman' It took 10 years to expose his #CORRUPTION#Turkishlira is a drastic fall in value against the US dollar for the second time in the week. A serious economic crisis before the country. Photo: @TSH_News#Turkey #TurkeyCrisis #Lira pic.twitter.com/t7UQflf371#EXPOSED: #Erdogan is a 'Snake Oil Salesman' It took 10 years to expose his #CORRUPTION#Turkishlira is a drastic fall in value against the US dollar for the second time in the week. A serious economic crisis before the country. Photo: @TSH_News#Turkey #TurkeyCrisis #Lira pic.twitter.com/t7UQflf371
The limits on currency swaps announced on Sunday night could be the first part of a plan by the Turkish government to tackle the crisis.
On Sunday Erdoğan accused foreign countries of waging war on Turkey and said his government would respond with trade measures to reduce reliance on the dollar and US markets.On Sunday Erdoğan accused foreign countries of waging war on Turkey and said his government would respond with trade measures to reduce reliance on the dollar and US markets.
His finance minister, Berat Albayrak, who is also his son-in-law, told the Hurriyet newspaper that he had an action plan ready to deal with the crisis.
“From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market,” Albayrak said, without giving details on what the steps would be.
Late on Sunday a large Turkish bank, Garanti, said it would not allow customers to open new foreign exchange positions, making it harder for people to seel lira for US dollars, pounds and euros.
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