World equities slip on Turkey currency woes

Cornelia Mascio
Agosto 14, 2018

The country's economic trouble has been heightened by a dispute with the USA that has centered on the continued detention of an American pastor who is on trial for espionage and terror-related charges.

Turkey's central bank, perhaps under the influence of a president who has declared himself an "enemy" of higher interest rates, is yet to raise interest rates in response to the crisis.

The latest trigger was Donald Trump's announcement that he would double import tariffs on Turkish steel and aluminium.

On Monday, the currency dropped to a historic low of 7.2 lira against the dollar before recovering slightly to 6.8 against the greenback.

MSCI's main emerging market equity index also fell briefly to its lowest level in more than a year earlier before stabilizing in early European trade.

Echoing his father-in-law, President Recep Tayyip Erdogan, whose policies and rhetoric have hurt confidence in the Turkish market, Albayrak called the lira's weakness an "attack".

"The aim of the operation is to make Turkey surrender in all areas, from finance to politics", Erdogan told ruling party members in the Black Sea city of Trabzon. "We are once again facing a political, underhand plot".

"A normalisation of relations with the USA 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.

As of August 2018, Turkey has an external debt of US$406 billion, US$99 billion of which is short term.

Turkish President Recep Tayyip Erdogan said on Monday the United States was seeking to "stab it in the back".

Such sell-offs are not uncommon during the summer - there was one this time last year prompted by concerns over North Korea - but investors are, nonetheless, very alert to the fact that most stock markets in western countries are now in their tenth year of the current bull run that began in March 2009. He also rejected capital controls as an option to stem outflows of hard currency and vowed to crack down on those he said were spreading damaging rumors that deposits would be seized. "You are exchanging your strategic partner in North Atlantic Treaty Organisation for a priest".

The Turkish currency's slide comes amid rising tensions between the U.S. and President Recep Tayyip Erdogan over trade.

"We can only say "goodbye" to anyone who sacrifices its strategic partnership and a half-century alliance with a country of 81 million for the sake of relations with terror groups", he said."You dare to sacrifice 81-million Turks for a priest who is linked to terror groups?" Trump has called the preacher's detention a "total disgrace".

Several days later Erdogan accuses Washington of showing an "evangelist, Zionist mentality".

But the bank did not increase interest rates, which would help contain inflation while supporting the lira.

Stock markets have been shaken by Turkey's currency crisis.

The lira's tailspin has unsettled global markets, with shares of European banks coming under particular pressure because of concerns over the lenders' exposure to Turkey.

Erdogan had on Saturday described interest rates as a "tool of exploitation", in remarks that may not be warmly welcomed by the markets.

The Brunson case is just one of many bones of contention between Turkey and the United States, ranging from Syria to Ankara's increasingly cosy relationship with Moscow.

Erdogan also hit back at United States authorities for convicting Mehmet Hakan Atilla, 47, deputy director general of Turkish lender Halkbank on charges of helping Iran evade USA sanctions on billions of dollars of oil proceeds.

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