Euro falls to one-year low as investors worry financial crisis could infect European markets
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Turkish lira fell almost 9% in early trading on Monday and the euro hit a one-year low as investors feared that the country’s financial crisis could spread to European markets.
Despite defiant words by the Turkish president Recep Tayyip Erdoğan over the weekend pledging as yet unspecified action to reverse the slide, the currency slipped alarmingly against the US dollar on Monday.
In early trading it reached an all-time low of 7.24 before bouncing back after the country’s banking regulator announced late on Sunday night that it would limit the ability of Turkish banks to swap the battered lira for foreign currency.
Asian stock markets were also down on Monday. The Nikkei in Japan lost 1.7%, Hong Kong was off 1.8%, Shanghai -1.7%, Sydney -0.5% and the Taiwanese bourse fell 3%.
The FTSE100 was expected to open down 0.4% later on Monday morning while Germany’s Dax 30 was set for a 0.65% fall.
The euro dropped 0.3% to a one-year low against the US dollar on Monday as the falling lira fuelled demand for safe havens, including the greenback, Swiss franc and yen. The Vix volatility index measuring turbulence in financial markets – also known as the fear index – jumped 16% on Monday.
There was also concern that other emerging market currencies – already under pressure from the rising US dollar – could be dragged into the lira’s downward spiral. The South African rand hit a low level not seen since mid-2016, the Russian rouble slumped again and the Indian rupee slid to an all-time trough.
The lira has tumbled more than 40% this year on worries about Erdoğan’s increasing control over the economy and deteriorating relations with the United States, chiefly over the war in Syria.
A decision by a Turkish court to extend the detention of Andrew Brunson, an American pastor accused of espionage for Kurdish militants and the Gülen movement, a group accused of masterminding the 2016 coup, forced the issue into the open with Donald Trump responding last week by doubling US tariffs on Turkish steel.
Chris Weston, of online trading firm IG Market in Melbourne, warned that global markets would be on edge as investors tried to assess the impact of the crisis on European banks which have lent money to
Turkey.
“The European Union’s financial watchdog [has] expressed concern about EU financial exposures to Turkey. And so, if it is a concern for this institution, then it should be for traders too,” he said.
Analysts at ANZ bank in Australia said contagion risks centre on Spanish, Italian and French banks exposed to Turkish debt, as well as Argentina and South Africa.
“Turkey’s massive pile of corporate debt denominated in foreign currencies, but a rapidly sliding currency – and inflation that’s threatening to go exponential – is a toxic combination.”
Andrew Kenningham, chief global economist at Capital Economics, said: “The plunge in the lira which began in May now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis.
“This would be another blow for emerging markets as an asset class, but the wider economic spillovers should be fairly modest, even for the euro zone,” he added.
The limits on currency swaps announced on Sunday night could be the first part of a plan by the Turkish government to tackle the crisis.
On Sunday Erdoğan accused foreign countries of waging war on Turkey and said his government would respond with trade measures to reduce reliance on the dollar and US markets.
His finance minister, Berat Albayrak, who is also his son-in-law, told the Hurriyet newspaper that he had an action plan ready to deal with the crisis.
“From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market,” Albayrak said, without giving details on what the steps would be.
Late on Sunday a large Turkish bank, Garanti, said it would not allow customers to open new foreign exchange positions, making it harder for people to seel lira for US dollars, pounds and euros.