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Turkish lira in free fall as mass protests spur fears Debt insurance costs at 18-month high

ANKARA, Dec 27, (Agencies): The Turkish lira hit a record low Friday as Prime Minister Recep Tayyip Erdogan, embroiled in a major graft probe, faced new mass protests and growing calls to resign. The currency fell to 2.1467 lira to the dollar while the Istanbul stock exchange, the BIST 100, dropped 3.76 percent around 0910 GMT Friday, after having dropped 2.33 percent Thursday and 4.2 percent Wednesday. “The situation in Turkey is severe to say the least, not only because of the huge fall in the Turkish lira and the stock market but also because massive uncertainty has taken hold which is unlikely to subside in the near future,” said Markus Huber, senior trader at London broker Peregrine and Black.
The plunge came as anti-government protests were planned Friday in Ankara and Istanbul, raising fears of violence similar to that in June when mass demonstrations swept the country.

“The fire is big, beyond expectations and spreading quickly,” wrote columnist Huseyin Gulerce in the Zaman daily affiliated with Fethullah Gulen, a US-based Turkish cleric engaged in a power struggle with Erdogan. Gulerce said the crisis that has shaken the government was no longer limited to a fight between Erdogan and Gulen followers but one now engulfing all state institutions. “The cabinet reshuffle may contain the fire for now but it will not put it out,” he wrote.

Erdogan overhauled his cabinet on Wednesday after three ministers quit over a graft scandal that had implicated their sons. The Hurriyet daily said Friday that the widening corruption probe was now targeting 41 additional people including a Saudi businessman. But a prosecutor involved in the probe said Thursday that his office had come under pressure from Istanbul’s chief prosecutor and police to block the case. Erdogan alleges the graft probe was orchestrated by outside forces bent on smearing his administration and undermining the country’s progress. He has ordered the sacking of dozens of police officers believed linked to Gulen, who has lived in self-imposed exile in the United States since 1999. The cleric, once an Erdogan ally, is hugely influential in Turkey and his followers hold key positions in the judiciary and the police.

The corruption probe poses the greatest challenge to Erdogan in his 11 years in power and the biggest threat to his undeclared ambition to run for president in 2014. Observers say the premier is increasingly struggling to hold on to power with his son the latest high-profile figure embroiled in the scandal. Local media said investigators were looking at a charitable foundation connected to the premier’s son Bilal. The scandal has weighed down on the local currency and fuelled anti-government sentiment brewing since the mass protests that engulfed the country in June. “In order for the lira and Turkish stocks to end their harsh descent, decisive leadership will be needed and credible measures taken which will appease foreign investors and the Turkish population alike,” said London trader Huber.

Meanwhile, Turkish debt insurance costs surged to 18-month highs on Friday and dollar bond prices tumbled as investors were rattled by a deepening political crisis that has engulfed top politicians, police officers and businessmen. The corruption scandal that has exposed fissures in the ruling AK Party before next year’s elections has taken a heavy toll on Turkish financial markets, with stocks set for their worst weekly performance since 2008. The cost of insuring exposure to Turkish debt in the credit default swaps (CDS) market hit 18-month highs of 253 basis points, more than 30 bps up from the previous close, according to data from Markit. The 5-year CDS contract traded at 191 bps in mid-December just before the crisis erupted.

Prime Minister Tayyip Erdogan who faces calls to step down, suffered another setback on Friday as a court blocked a government attempt to force police officers to disclose investigations to their superiors.
“Political developments in Turkey over the past 10 days have introduced uncertainty into the system that has not been present for a number of years,” Unicredit said in a note, adding that Erdogan faced a stiff test from the 2014 elections. “Before these events, few questioned the ability of AKP to win the upcoming elections in the face of a disjointed opposition but this can no longer be considered a done deal.”

Investors who generally view the AK Party as business-friendly, have been dismayed at the developments that come just months after mass anti-government protests in Istanbul and have dumped Turkish stocks and bonds. Sovereign bonds have fallen sharply in recent days, with the 2034 dollar bond price down almost 3 points in price on Friday to trade at the lowest since May 2010. The 2036 issue is also down 3 points, having fallen more than 7 cents in the dollar since mid-December. However both bonds still trade close to or above par. Lira-denominated debt has also sold off heavily, with two-year yields rising 100 bps over the past two weeks to over 10 percent as the lira has hit record lows to the dollar.

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