Markets

Turkey's central bank steps in after the lira nosedives to an eight-month low

Key Points
  • Credit default swaps, or the cost of insuring exposure to Turkish debt, spiked 11 basis points (bps) in one day to reach 483 bps, similar to levels seen ahead of Turkey's local elections in late March, Reuters reported, citing IHS Markit. Dollar bonds for the country of 80 million fell across the curve.
  • The lira was trading at 6.225 to the dollar at around 1:00 p.m. Istanbul time.
  • Analysts attribute some of the pressure to concerns over U.S.-China trade talks, but the lira has now been on a downward spiral for more than a year.
A money changer counts Turkish lira banknotes at a currency exchange office in Istanbul, on August 8, 2018. 
Yasin Akgul |  AFP | Getty Images

Turkey's beleaguered currency breached 6.24 against the dollar in Thursday trade, its lowest level in eight months amid deep market uncertainty worsened by the recent announcement of new elections for the city of Istanbul.

Credit default swaps, or the cost of insuring exposure to Turkish debt, spiked 11 basis points (bps) in one day to reach 483 bps, similar to levels seen ahead of Turkey's local elections in late March, Reuters reported, citing IHS Markit. Dollar bonds for the country of 80 million fell across the curve.

The lira was trading at 6.225 to the dollar at around 1:00 p.m. Istanbul time. It trimmed some losses after the central bank announced it was suspending one-week repo auctions — which essentially inject cash into banking system — in a bid to shore up the currency. Analysts have attributed some of the pressure to concerns over U.S.-China trade talks, but the lira has now been on a downward spiral for more than a year.

The currency, which has been ranked the worst-performing in emerging markets for several consecutive weeks, was trading at 5.9642 to the greenback at the close of last week. Last year saw the lira lose as much as 40% of its value against the dollar as Turkey fell into recession. For perspective, one dollar bought just 3.5 lira in mid-2017.

Increasing investor flight from Turkey over the past several months has been triggered by what many have described as a market too vulnerable to political intervention and suffering from weak foreign currency reserves, a wide current account deficit and rising tensions with the U.S. Turkey's central bank, under pressure from the government, has been reluctant to raise interest rates despite the official rate of inflation at more than 19%.

Just on Tuesday, the lira had hit a seven-month low after the country announced a fresh election for the commercial hub of Istanbul on the demands of Turkey's ruling AK Party (AKP), which narrowly lost it in the March elections.

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AKP alleged vote count irregularities, a claim the opposition Republican People's Party (CHP) rejected. The CHP says it expects its mayoral candidate Ekrem Imamoglu to win again and accused Turkey's election board of "destroying laws, the judiciary and justice."

Turkey analysts say the new election, scheduled for June 23, simply delays much-needed economic reform plans from President Recep Erdogan's government. For many investors, it casts further doubt over the soundness of Turkey's institutions and democracy, which critics accuse Erdogan of chipping away at over his past several years in power.

The elections being re-run delays plans to reform the economy by at least two months, said Edward Parker, a managing director at Fitch Ratings who focuses on Turkey.

"We have another nearly two months of extra uncertainty," he was quoted as telling Reuters earlier this week. He added that Fitch's rating of "BB" for Turkey, which was downgraded last July amid the country's economic turmoil, could fall further if existing weaknesses and volatility intensify.

—Reuters contributed to this report.