Stocks close lower amid Turkish currency crisis

Turkey has plan to ease market concerns, minister says, as lira plunges again

At first glance, this seems like a problem peculiar to Turkey, as the country's economy has weakened.

Should private Turkish debtors, who owe around 75% of Turkey's external debt, fail to service their share as a result of the nosediving lira and creditors' unwillingness to lend any more hard currency, the European financial system might have to absorb significant losses.

Deutsche Bank estimates a 4 percent hit to UniCredit's equity in a worst case scenario. The country has run a large trade and investment deficit with the rest of the world, buying more than it sells and relying on foreign investment and lending.

Economists have warned that such statements by Erdogan could prolong the crisis, along with his refusal to raise interest rates, in line with his claim that low interest rates cause low inflation - a view at odds with mainstream economic analysis. President Recep Tayyip Erdogan, an opponent of interest rates who has wielded more influence over Turkey's central bank this year, continued to blame the sell-off on external forces like Washington. If the central bank doesn't move aggressively, the lira could continue to tumble and the capital outflows the country has relied on to finance its needs will continue to flee.

Central bank currency reserves What happens next?

"Some close the doors and some others open new ones", added Erdogan, who has built closer ties over the last few years with countries from Latin America, Africa and Asia.

The lira slipped below 7.0 to the U.S. dollar and was down 12 percent on Friday's value at one point this morning.

Also caught up in the sell-off is Russia's ruble, which today hit its lowest level against the United States dollar since April 2016 and its lowest level against the euro since April this year, partly reflecting the high amount of borrowing in foreign currencies by Russian corporates, but also concern about the damage that the latest round of USA sanctions against Moscow - imposed in the wake of the Salisbury poisonings - will do to the country's economy. Following unsuccessful negotiations last week to resolve Brunson's case, President Trump announced on Friday that he was imposing new tariffs on Turkish steel and aluminum, sending the lira into free-fall.

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"A normalisation of relations with the U.S. could also reduce the amount of legwork that the central bank will have to do to control the economic situation, but this is unlikely to happen at the moment", she added. The lira has lost most than 40 percent of its value so far in 2018. "It has exacerbated the strain on emerging markets, which use local currencies to pay down their dollar-backed debts".

Turkey's worsening feud with the Trump Administration has also put pressure on the currency. The euro currency dropped to a 13-month low on Friday, and bank shares fell. BBVA is the most exposed, followed by UCG, ING, BNPP and HSBC, whose share price was down 0.8 per cent in afternoon trading.

Trump has been criticising the company since June, when it said it would move more manufacturing out of the U.S. to avoid European tariffs.

Travel firm TUI was the biggest faller on the FTSE, down 3.3 per cent this morning while emerging markets specialist fund house Ashmore was down five per cent.

Analysts at JPMorgan Cazenove and Deutsche bank calculated the impact on the four banks of a potential exit from Turkey, including the write-down of their assets there and the loss of intergroup funding.

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. Notably, after the US last week imposed sanctions on Ankara, Erdogan's first call was to Moscow. So far he's shown no sign of doing either. 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. "This is a domestic and national struggle".


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