Turkish Lira Weakens, Moody’s Delivers More Downgrades

August 28, 2018 Updated: August 29, 2018

ISTANBUL—The Turkish lira weakened on aug. 28 as investors weighed up Turkey’s efforts to manage its rift with the United States after Finance Minister Berat Albayrak said U.S. trade sanctions against Ankara could destabilize the Middle East.

The currency has lost about 38 percent of its value against the dollar this year due to a sell-off accelerated by a row with Washington over an American evangelical Christian pastor detained in Turkey on terrorism charges.

More broadly, investors are worried about the direction of monetary policy under President Tayyip Erdogan. The president, a self-described “enemy of interest rates” has repeatedly put public pressure on the central bank and picked Albayrak, his son-in-law, as finance minister.

The attendant sell-off in the lira has raised concerns about the impact on the broader economy—given Turkey’s reliance on dollar-denominated energy imports—and a possible surge in bad loans in the banking sector.

The main stock index  rose 2.83 percent by Aug. 28 close to 93,866.94 points.

“At this point in time Turkey has become pretty much un-tradable,” said Tim Ash of BlueBay Asset Management in emailed comments. “The market wants to see specific delivery on policy whether that is monetary, fiscal or action to clear up problems in the banking sector.”

Germany denied a report that it might provide financial aid to Turkey to help it weather the currency crisis.

Also on Aug. 28 ratings agency Moody’s downgraded 20 Turkish financial institutions, saying there were signs of substantial increase in risk of a downside scenario. It said Turkey’s operating environment had deteriorated beyond previous expectations.

‘Turkey Must Reform Itself’

Facing economic pressure from the United States, Turkey has signaled a wish to improve strained ties with the European Union, which it still aspires to join despite disagreements.

After meeting his French counterpart in Paris on Aug. 27, Albayrak also took aim at the United States, saying U.S. sanctions could ultimately aggravate the region’s terrorism and refugee crises.

Both Erdogan and Albayrak are also set to visit Germany at the end of September.

The Wall Street Journal reported that Germany was in early-stage talks to provide emergency financial aid to Turkey, fearing its economic troubles could spread to Europe and further destabilize the Middle East. But a German official denied this.

“You can’t do much from the outside but to stress that Turkey must reform itself,” a second official told reporters.

U.S. President Donald Trump this month authorized a doubling of duties on aluminum and steel imported from Turkey, triggering retaliatory measures from Ankara.

Investors are also worried by a U.S. Treasury investigation into state-owned Turkish lender Halkbank which could face a potentially hefty fine over allegations of busting sanctions on Iran. The bank has said all its transactions were legal.

Turkey and the United States are also at odds over their diverging interests in Syria and U.S. objections to Ankara’s plan to buy Russian defense systems.

Separately, Ankara announced a new campaign on Aug. 28 to support the real estate sector, offering a 10 percent discount on some home sales. Under the campaign, any price increases due to rising exchange rates will be discounted from the cost of the residence, the environment and urbanization minister said.

 

By Daren Butler

RECOMMENDED