Turkey has become the epicentre of emerging market market instability once again as their moves to protect the Turkish Lira have rattled financial Markets
Turkey’s efforts to halt a slide in its currency saw them soaking up liquidity to block speculators from exiting their Lira short positions. This had the desired effect of protecting the Lira’s value but had sever knock-on effects with the stock market falling 6% on the day and borrowing costs surging significantly, alongside the risk of default. Currencies in emerging markets such as South Africa and Brazil are also seeing a rise in expected volatility as investors fear a flight-to-safety and the recent U.S. yield curve inversion may be a consequence of this, rather than pure economic expectations.
It has been suggested that the restrictions will be lifted after this weekend’s elections but the aggressive move has sent ripple effects through the financial markets as investor’s question the safety of investing in Turkey. The move comes on the back of President Erdogan’s attack on speculators, where he named JP Morgan in particular.
If the Turkish President is looking to blame the country’s woes on foreign speculators then it may not be good for European banks, with Spanish banks in particular heavily invested in the country. Turkey’s foreign debt load sits at $450 billion- one of the largest in emerging markets- with $276 billion of this denominated in dollars and euros, which has suffered through the Lira’s slide and put pressure on local banks and corporations.
If Turkey decide to suspend payment or default on this debt, it could be the spark that ignites a real financial crisis, for a world that is seeing stuttering growth.