Turkish lira edges up from record low on central bank pledge

Mae Love
August 14, 2018

The lira tumbled by 12 percent on Monday, Aug. 13 but recovered to a loss of 7 percent, leading some economists to warn it could trigger the next financial crisis.

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Here is a look at some of the reasons behind the plunge and how it might affect the rest of the world.

He alluded to multifaceted rows, including United States sanctions and Turkey's estrangement within North Atlantic Treaty Organisation.

Benchmark 10-year notes last fell 4/32 in price to yield 2.8714 per cent, from 2.859 per cent late on Friday. Raising interest rates, President Erdoğan has argued, only benefits the rich.

Meanwhile, Turkey's Financial Crime Investigation Board (MASAK) also launched a probe into what it described as "fake news" aiming to manipulate economy.

The structural problems in the Turkish economy - which enjoyed impressive growth of 7.4 in 2017 - are seen as high inflation which is now close to 16 percent, a widening current account deficit and a banking system with foreign currency denominated debt. To do that, they have to sell lira - worsening the rout.

Turkish President Recep Tayyip Erdogan this morning claimed the country was under economic "siege", accusing the U.S. of trying to "stab it in the back".

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But there are fears that Mr Erdogan, who is famously averse to interest rate rises, may be pressuring the central bank not to act.

It's all part of an action plan announced by Treasury and Finance Minister Berat Albayrak late Sunday to respond to market tumult. And Trump then hurled fuel on the flames with his tweet over the tariffs, prompting Friday's crash. "We will continue increasing our exports", he said. That caused a further drop in the lira. "We go through the list of options they have to stop this: it involves rate hikes, getting the International Monetary Fund involved and restoring market confidence in the lira". China's yuan dipped a little more than 0.3 percent on Monday, adding to the losses the currency has sustained this year.

However, the lira remains fragile given the market's lack of faith in the Turkish government's willingness to take the actions needed to its support its currency. So the sudden fall raises the possibility of corporate bankruptcies or bank failures that could hurt the economy. The eurozone's chief financial watchdog has become anxious about the exposure of major European lenders - mainly Spanish and French banks - to Turkish debt. Spain's BBVA has significant exposure, with 31 percent of pre-tax profit coming from Turkish operations. UniCredit, BNP, ING and HSBC have smaller businesses there.

Deutsche Bank has highlighted five lenders most at risk due to their "meaningful presence" in the country.

However, the currencies of both countries, along with those of other emerging markets such as Indonesia, India and Russian Federation, have all found themselves under pressure, reflecting how contagion can spread through markets in the most unexpected of ways. It has also dented emerging market stocks while curbing growth and the outlook for oil demand.

Additionally, Europe is nervous because it depends on Turkey to restrain the flow of migrants from conflict in the Middle East in return for aid. Some 4 million displaced people, most them from Syria, are now living in Turkey.

Contagion risks seem to be rising. Money controls could backfire because Turkey needs foreign investment. He has mainly blamed foreigners for trying to destabilize the country and equated the financial turmoil to the 2016 coup attempt that sought to depose him.

Turkish lira to the USA dollar.

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