The Turkish lira plunged Friday on investor concerns that
the country won’t repay its debts, a shock that set off sharp falls in other
emerging-market currencies, hit the euro and European banks, and pushed the
dollar to a one-year high.
For months, investors have questioned Turkey’s financial
health, but the impact was limited to its domestic market. On Friday, those
concerns spread beyond Turkey.
The turmoil intensified when President Recep Tayyip Erdogan
said Turkey was engaged in an “economic war.” President
Trump shortly afterward said in a tweet that tariffs on Turkish
aluminum and steel would be doubled amid a deepening diplomatic spat between
the U.S. and its strategically important ally.
On Friday, the lira fell almost 14% against the U.S. dollar
in European afternoon trading and 45% over the past 52 weeks—the second-biggest
decline for a Group of 20 currency over the past decade. The lira dropped more
than 20% this week alone.
Turkish sovereign bonds also sold off, with yields on
10-year debt trading above 20%, compared with 19% Thursday and roughly 12% at
the start of May.
Among Turkey’s problems: the U.S. recently sanctioned two
Turkish ministers because the country is holding an American
pastor for what Washington believes are politically motivated reasons.
“Erdogan has single-handedly inflicted harm to Turkey to
the point of extreme vulnerability, but [the U.S. doubling sanctions] is the
straw that breaks the camel’s back,” said Jan Dehn, head of research at
emerging-market investment manager Ashmore Group.
As the lira falls, it will become harder for Turkey to pay
a large laps of debt denominated in other currencies. Turkey’s external debt as
a percentage of gross domestic product is above 50%, one of the highest among
developing economies, and the ability of its foreign-reserve pot to meet those
demands is one of the weakest, figures from the World Bank and the
International Monetary Fund show.
The lira took its first dive early Friday following a Financial Times report that the European Central Bank was
examining lenders’ exposure to Turkey. Three banks named in the piece tumbled:
Spain’s BBVA SA fell 6.3%, France’s BNP Paribas dropped 4.2% and Italy’s
UniCredit slid 4.3%.
Data from the Bank for International Settlements showed
that lenders in Spain, France and Italy had the highest exposure to the Turkish
economy at the end of the first quarter, adding up to $81 billion, $35 billion
and $18 billion, respectively.
The ECB’s concerns aren’t too high at this point but it is
in contact with eurozone banks about their exposure to Turkey, a person
familiar with the matter said.
The Turkish currency later recouped some of its losses, but
dropped again after Mr. Erdogan addressed a crowd of supporters, asking Turks
to exchange “any dollars, any euros or gold” for the domestic currency to shore
it up.
“If they have their dollars, but we have our people, our
righteousness, and our God,” Mr. Erdogan said a day earlier.
The selloff deepened further after Mr. Trump’s tweet, as
well as vague economic plans disclosed by Finance Minister Berat Albayrak, Mr.
Erdogan’s son-in-law. Investors say the Turkish government is unlikely to
announce the measures needed to assuage markets, such as allowing the central
bank to raise interest rates sharply or asking for an International Monetary
Fund bailout.
“When you have an imminent shock you can’t really address
it without proving details, and [Mr. Albayrak’s presentation] was super short
on details,” said Viktor Szabo, senior investment manager at Aberdeen Standard
Investments.
Investors said Friday’s moves were accentuated by thin
trading. The differences between quoted prices to buy and sell lira was “wide
enough to park a bus,” said Paul McNamara, investment director for
emerging-market debt at GAM International Management, meaning that a $10
million sale was enough to move the currency a full percentage point.
While fears of market contagion appeared contained, the
sharp moves recalled for some investors previous episodes when trouble in
countries such as China and Greece fed wider market anxiety. Emerging markets
were already grappling with a stronger dollar and fears over U.S. sanctions
hurting global trade.
The Stoxx Europe 600 index fell 1.1% Friday, and the euro
dropped 1.1% against the dollar to its weakest level since July 2017. The
S&P 500 shed 0.6%.
Some other emerging-market currencies also weakened, with
the South African rand and the Hungarian forint falling 2.6% and 1.9%,
respectively. The Russian ruble fell 0.9% and hit a two-year low.
By contrast, haven assets like the Japanese yen, as well as
U.S. and German government bonds, gained amid the turmoil. The WSJ Dollar
Index, a measure of the greenback’s strength against a range of trading
partners’ currencies, rose 1%.
The broader impact of a weaker Turkish economy is expected
to be relatively small. Carsten Hesse, economist at German bank Berenberg, said
that even a 20% fall in eurozone exports to Turkey would only subtract only 0.1
percentage point from the bloc’s growth.
Still, some fund managers say fears about Turkey could
trigger outflows from other emerging-market countries and push the dollar even
higher.
During the eurozone’s
sovereign-debt crisis between 2010 and 2015, concerns over the
financial frailty of Greece hit markets world-wide. A limited depreciation of
China’s currency in 2015 also sparked stock market selloffs.
Charlie Robertson, global chief economist at Renaissance
Capital, said that the longer-term “contagion effect” would be limited because
Turkey has a small presence in the widely tracked MSCI Emerging Markets index,
so investors exiting Turkey won’t be forced to sell assets in other developing
nations.
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