Turkey has ‘only days’ to resolve lira crisis or risk instability & financial free-fall


Analysts have given Turkey just days to resolve the crisis before it spills over into longer-term implications for the country’s financial stability, with the contagion threatening banks including HSBC.

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

It comes after the Turkish currency fell to a new low of 7.2 lira to the dollar, dragging the MSCI world equity index, which tracks shares in 47 countries, down 0.6 per cent as markets opened. After several hours of volatile trading, the Turkish lira has settled around 6.87 lira to the US dollar.

The yield on a Turkish government bond maturing in February 2028 surged by almost a percentage point to highs of 9.347 per cent at the time of writing, according to Tradeweb. Bond yields move inversely to prices.

But Fiona Cinoctta, senior market analyst at City Index, said the Turkish government only has a few days to stem the crisis before it started spilling out into other markets.

“For the time being Turkey’s financial crisis looks localised but the country’s central bank has perhaps only days to stop the decline of the currency before the lira’s freefall results in loan defaults, starts seriously affecting the country’s financial system and potentially starts spilling over onto European banks,” she said.

The Economist Intelligence Unit’s Agathe Demarais said it would require “credibly orthodox economic policies, fiscal discipline and central bank independence to reverse the current situation”.

“A normalisation of relations with the US 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. “In view of the domestic political and economic conditions, it is therefore unclear whether the necessary steps will be taken to contain the market fallout.”

Deutsche Bank has highlighted five lenders most at risk because of their “meaningful presence” in the country. BBVA is the most exposed, followed by UCG, ING, BNPP and HSBC, whose share price was down 0.8 per cent in afternoon trading.

“In a worst- case scenario involving total loss of local equity and any intergroup funding, we see a range of circa one-12 per cent of group equity losses for these banks,” it said in a note. “To be clear, this is not our base case, but even if it were to occur, the impact should be manageable for European Banks.”

HSBC’s worst case scenario would result in a $400m loss of equity, equivalent to 0.3 per cent of total group equity, Deutsche said.

It is not just banks taking a hit from the currency’s collapse. 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.

During a press conference this morning Erdogan insisted that Turkey’s economy remained strong and said the currency would soon settle “at the most reasonable level.”

He instead slammed “the bullies of the global system”, saying they “cannot roughly, shamelessly encroach on our gains that were paid for by blood”.

Erdogan predicted the lira would return to “rational levels” soon, stressing the fall had come as the consequence of a plot rather than economic fundamentals.

German Chancellor Angela Merkel told reporters in Berlin: “No one has an interest in an economic destabilisation in Turkey. But everything must be done to ensure an independent central bank.”

Erdogan has been criticised for forcing the central bank to keep interest rates at 17.75 per cent, despite rampant inflation. Economists believe it should be as high as 27 per cent.