Turkey’s financial selloff accelerates; Turkish lira, bonds plunge with broader EM selloff

By Rebecca Melvin

New York, Aug. 10 – Turkey’s financial crisis took a turn for the worse on Friday with yields on its sovereign debt surging past 20% as the Turkish lira plunged another 14% to well over 6 lira to the U.S. dollar, an all-time low. Only five days ago, the currency crossed the 5 lira to the dollar mark for the first time.

Turkey’s 6 1/8% dollar notes due 2028, of which $2 billion priced earlier this year, fell off a cliff, trading down to about 81¼ from more than 88 at the outset of the session and down from 90 earlier in the week.

Meanwhile other emerging markets currencies sold off and the U.S. dollar surged, while emerging markets debt sold off, leaving the J.P. Morgan U.S. dollar emerging markets bond ETF down an outsized 1.22 point, or 1.1%, to 106.37 on the day.

The South African rand and Hungarian florint saw notable declines on Friday, and there were concerns that Turkey’s problems could create outflows from other emerging market countries, pushing prices lower and the dollar even higher.

Turkey’s markets have been under pressure all week, but on Thursday President Recep Tayyip Erdogan took a defiant stance toward the United States and left market players doubtful that steps to combat Turkey’s financial position will be taken in the near term. Specifically, these steps would be allowing the central bank to raise interest rates to combat high inflation or asking the International Monetary Fund for a financial backstop, sources said.

According to reports, Erdogan said in one address, “don’t forget, if they have their dollars, we have our people, our righteousness, our God.” In a second address he called on the Turkish people to exchange their international currencies and gold into lira in an effort to shore up the currency, which stood at 6.46 to the dollar, at the end of Friday in New York, up from 4.90 a week ago and 3.79 lira in early January.

Both Erdogan and Russian Prime Minister Dmitry Medvedev used the term “economic war” in separate statements referring to U.S. sanctions.

In response, U.S. President Donald Trump said in a tweet on Friday that he authorized a doubling of tariffs on Turkish aluminum and steel to 20% and 50%, respectively.

But even without the threat of U.S. sanctions, which are tied to a diplomatic impasse over an American pastor who has been detained since 2016 on what the United States believes are politically motivated charged, Turkey’s situation is precarious. The country has 16% inflation and its external debt as a percentage of gross domestic product is above 50%.

Meanwhile, talks between a delegation of Turkish officials and U.S. counterparts in Washington this week to negotiate the release of the pastor, Andrew Brunson, have led to no resolution so far.

The rest of emerging market debt took a big hit on Friday, and the rout extended beyond the boundaries of the asset class, shooting down global stocks and sending save haven assets higher except notably for gold. The European Central Bank said it is concerned about the impact of the weak lira on European banks, especially BBVA, UniCredit and BNP Paribas.

Emerging markets debt including corporate and sovereign bonds stands at about $57 trillion, which is 30% of the global total, and emerging markets account for 60% to 70% of global growth.

On Monday, the Turkish central bank lowered the foreign exchange markets reserve requirement limit to 40% from 45% to stabilize the currency. But by Wednesday, the lira stood at 5.28 per U.S. dollar, nearly the same level as before the bank took action.

© 2015 Prospect News.
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