Turkey faces another week of financial-market turmoil with the Turkish lira plunging further after rattling global markets on Friday.
The tensions sent the S&P/ASX 200 index down 26 points, or 0.4 per cent, to 6252. The Australian dollar fell back to its early 2017 level to trade US72.88c. European stocks also hit a three week low. US stocks closed lower again with the S&P 500 and the Dow Jones Industrial Average down for a fourth straight session.
The escalating dispute with US president Donald Trump and concerns about the management of the Turkish economy saw the Turkish lira losing a fifth of its value against the dollar last week.
The lira has fallen more than 40 per cent since the start of the year, putting pressure on Turkish companies burdened with unhedged dollar- and euro-denominated debt and raising fears that the country will struggle to meet its large external financing needs.
Turkey’s central bank yesterday announced measures to free up cash for banks and Turkey’s interior ministry announced it had started legal investigations against 346 social media accounts it claimed were driving down the lira.
The sharp fall in the lira has been raising concerns about Turkish lenders’ ability to repay their large foreign debts with Bank of International Settlements figures showing Spanish banks lent $80.9 billion to banks headquartered in Turkey, including subsidiaries, in the first quarter. That was followed by the $35.15 billion lent by French banks and $18.49 billion by Italian banks.
This in turn has spooked investors worried that this will create another global financial crisis.
“Investors are clearly concerned that Turkey’s government won’t act (or allow the central bank to act) to shore up the currency, and fears are mounting that this could result in a crisis in Turkey’s banking sector,” William Jackson, chief emerging markets economist for Capital Economics, wrote in a note for clients. “After all, over a third of domestic lending is in foreign currencies, and banks have substantial short-term external debt.”
Turkish consumers are facing rising food, fuel and medicine prices with the inflation rate expected to jump rapidly from the current 15.4 per cent official rate.
Turkish President Recep Tayyip Erdogan, who assumed new financial powers after Turkey’s election last June, has has urged Turks to take dollars, euros and gold kept under their pillows and convert it to lira to prop up the currency.
The lira plunged after Mr Trump said the US would double tariffs on imports of Turkish aluminium and steel, escalating the dispute over the detention of American evangelical pastor Andrew Brunson on terrorism charges.