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Turkish lira weakens after US threatens more sanctions – as it happened

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Turkish currency falls 5% at the end of a tumultuous week; European stocks drop after Turkish court rejects US pastor’s appeal for release

 Updated 
Fri 17 Aug 2018 09.52 EDTFirst published on Fri 17 Aug 2018 02.51 EDT
People line up at a currency exchange shop in Istanbul. Investors have been pulling out of Turkey’s markets, sending its stock market and currency plunging.
People line up at a currency exchange shop in Istanbul. Investors have been pulling out of Turkey’s markets, sending its stock market and currency plunging. Photograph: Lefteris Pitarakis/AP
People line up at a currency exchange shop in Istanbul. Investors have been pulling out of Turkey’s markets, sending its stock market and currency plunging. Photograph: Lefteris Pitarakis/AP

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The Turkish lira has taken another battering today, falling 5% to 6.1 to the dollar (it lost nearly 7% at one stage) and the Turkish stock market is down 1%.

It has been a tumultuous week that saw the lira go into meltdown on Monday when it hit a record low of 7.2 against the dollar and the panic spread to other emerging markets. A pledge by Turkey’s central bank to provide liquidity to banks and other measures, a pledge from Qatar to provide $15bn in loans to Turkey, and reassuring words from the finance minister yesterday helped calm nerves.

But this afternoon, a Turkish court rejected a US pastor’s appeal for release, a day after the United States warned of further sanctions unless Ankara hands over Andrew Brunson, who is under house arrest.

Reuters reported that a court in the western province of Izmir rejected an appeal to release the paster, saying evidence was still being collected and he posed a potential flight risk, according to a copy of the court ruling seen by the news agency.

The lira has lost nearly 40% of its value against the dollar this year. The currency crisis has deepened concerns about the Turkish economy, in particular its dependence on energy imports and its foreign-currency debt burden.

Standard & Poor’s is expected to downgrade Turkey’s sovereign credit rating after the markets close today. Turkish markets will be closed from midday on Monday for the rest of the week for the Muslim Eid al-Adha festival.

European stock markets are down –

  • UK’s FTSE 100 index down 0.4%
  • Germany’s Dax down 0.7%
  • France’s CAC down 0.5%
  • Italy’s FTSE MiB down 0.9%
  • Spain’s Ibex down 0.3%

On Wall Street, the Dow Jones and Nasdaq are flat.

We are closing the blog for today. Have a great weekend. We’ll be back next week.

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Even so, Schmieding reckons that the impact on the eurozone will be very limited. He says:

Exports: The eurozone earns 0.57% of its GDP by selling goods to Turkey. Even a 20% fall in exports to Turkey would not subtract more than 0.1ppt from annual Eurozone GDP growth. As global demand remains healthy, eurozone firms could likely contain the damage further by switching to other markets for some of these affected goods with only modest reductions in their selling prices.

Financial linkages: Spain, France and Italy are the most exposed eurozone countries to Turkey. According to BIS data, the exposure to Turkey of banks domiciled in these countries stands at $81bn for Spain, $35bn for France and $18bn for Italy. A major part of this consists of equity stakes in Turkish banks rather than in more dangerous intra-company loans or direct credit exposure. Turkish losses may well affect individual institutions in the Eurozone visibly.

Still, eurozone banks are in much better shape than they were during the 2011-2012 euro crisis which had come right in the wake of the 2008/2009 mega-recession. The risk that the exposure of some banks to Turkey could turn into a systemic problem for the eurozone and/or cause a tightening of credit conditions in Spain, Italy or France remains remote.

Confidence effect: The real risk stems from the level of noise. Confidence and hence the readiness to spend and invest often drives the business cycle. As confidence is currently fickle with no established trend, even small but highly visible problems can nourish the feeling that the world is a dangerous place rather than full of exciting opportunities. We therefore see a clear risk that any noisy crisis - such as the Turkish turmoil - could take some toll on the Eurozone and retard the upturn in markets and business sentiment for a while.

Holger Schmieding, economist at Germany’s Berenberg, says the bank has lowered its year-end forecasts for the euro to $1.17 from $1.21, due to the Turkey crisis.

Turkey is no small fry. It contributes 1% to global GDP. Beyond the obvious geopolitical concerns, a major Turkish recession would pose a significant challenge for financial markets and for other economies.

Remembering the tremors which Turkey’s smaller neighbour Greece once sent through European and global markets, investors are understandably nervous. Adding to concerns about Italy’s 2019 budget and Brexit uncertainty, the noise from Turkey could delay the rebound in eurozone business confidence and growth for a few more months despite the easing of US-EU trade tensions.

Over in the US, Donald Trump has revealed that he has asked the Securities and Exchange Commission to look into whether American companies should report earnings on a half-year, rather than a quarterly basis.

In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!

— Donald J. Trump (@realDonaldTrump) August 17, 2018

The Turkish lira is still down 5.4% on the day, with one dollar buying 6.14 lira. The Turkish stock market has turned positive, however, gaining 0.6%.

Other emerging markets currencies are also under pressure, with the Mexian peso down 0.7% and the South African rand losing 0.9%.

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European stocks fall after Turkish court rejects pastor appeal

European stock markets have turned negative, after a Turkish court rejected the US pastor Andrew Brunson’s appeal for release.

  • UK’s FTSE 100 index down 0.46%
  • Germany’s Dax down 0.58%
  • France’s CAC down 0.28%
  • Italy’s FTSE MiB down 1.2%
  • Spain’s Ibex down 0.4%

Michael Hewson, chief market analyst at CMC Markets UK, has tweeted:

If talk of an S&P downgrade of Turkey priced in - surely Turkish banks downgrade will follow soon after if downgrade occurs $TRY

— Michael Hewson 🇬🇧 (@mhewson_CMC) August 17, 2018

He wrote earlier this morning:

A $15bn rescue package from Qatar, and a limited package of exchange controls in limiting banks’ ability to take out short positions has bought the Turkish lira some brief respite in the last few days, but let’s not kid ourselves here, unless president Erdogan takes steps to restore confidence in his stewardship of the Turkish economy then we could well see the lira come under further pressure.

The US doesn’t appear in any mood to relieve the pressure on the Turkish government in securing the release of their pastor, if recent comments from vice President Mike Pence, and Treasury secretary Steve Mnuchin are any guide. President Erdogan may be able to defray some of the risks to the Turkish economy by trying to improving his ties with Germany and Russia, but if the US really wanted to turn the screws it’s unlikely that these countries would be able to do much about it.

One currency trader told Reuters that the weakness of the lira was driven by the “new US sanctions threat and the S&P decision, with position-closing in markets ahead of the public holiday”.

Standard & Poor’s is expected to downgrade Turkey’s sovereign credit rating after markets close today. Next week, the Turkish markets will be closed for Eid al-Adha, the Festival of Sacrifice, from Tuesday until Friday.

The Turkish stock market has slid 1.3% today.

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William Jackson of Capital Economics said:

There has been no sign that the central bank will be allowed to raise interest rates significantly and return rates to positive territory. Similarly, there has been no improvement in relations with the US, and additional sanctions may be on the horizon.

Turkish lira under pressure again

The Turkish lira is under pressure again, falling nearly 7% against the dollar at one stage to 6.24. It is now trading at 6.04, down 4% on the day.

The currency has lost almost 40% against the dollar this year, hit by a diplomatic row with the US and and investor concerns about the country’s financial policies and its foreign-currency debts. The independence of the Turkish central bank and its finance minister have been called into question. The central bank is refusing to raise interest rates to curb inflation, with Turkish president Erdoğan opposed to rate hikes.

The appointment of his son-in-law Berat Albayrak as finance and treasury minister last month also alarmed investors, although Albayrak managed to calm nerves yesterday when he addressed thousands of investors and analysts on a conference call.

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After nearly nine years of financial crises and austerity, Greece is about to come out of its third bailout programme – on Monday, at midnight. Greece borrowed more than €288bn from international creditors in the biggest bailout in history.

Greece’s finance minister, Euclid Tsakalotos, said earlier this week that Turkey’s woes would not affect Greece’s exit from the bailout. He said:

A clean exit is based on the following: the Eurogroup agreement on Greece’s debt management, and the cash buffer the government has created which guarantees that the public sector’s funding needs will be met in the next two or three years.

Therefore, the Greek government’s plans are not affected by short-term turmoil in the markets. On 21 August, Greece is turning the page, and this is final.

You can read more here.

A man takes part in a anti-austerity pro-government demo in front of the parliament in Athens on 11 February, 2015. Photograph: Yannis Behrakis/Reuters

According to the Deutsche Bank economist Oliver Harvey, the UK, Germany and the US have lent the most to Turkey, says Ed Conway, economics editor at the Times. We are trying to get hold of the note...

Contrary to what you might have read elsewhere, it’s not Spain/Italy who are most exposed to financial fallout in Turkey but the UK. Chart from Oliver Harvey at DB. More on this in my @thetimes column today: https://t.co/dgqwRyBHxg pic.twitter.com/ep3z2GqsnE

— Ed Conway (@EdConwaySky) August 17, 2018

Turkish president Erdoğan’s administration has been adamant that it won’t have to seek a bailout from the International Monetary Fund. Qatar pledged about $15bn in loans on Wednesday but provided few details.

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