Turkey Moves to Calm Investors After Coup Attempt Quashed

(Bloomberg) -- The Turkish government moved swiftly to calm investors before financial markets reopen Monday after a failed coup, with the central bank promising unlimited liquidity to lenders and the deputy prime minister posting on Twitter that there’s “no need to worry.”

Turkey’s lira plunged the most against the dollar in eight years on Friday as tanks rolled through the streets of Ankara and Istanbul, and warplanes and helicopters circled overhead. While President Recep Tayyip Erdogan’s forces rounded up thousands of judges and military officers involved in the coup attempt, officials sought to prevent a sell-off when stocks and bonds traders have their first chance to react to the news on Monday.

“We’re on duty,” Simsek said on Twitter, adding that he’d spoken to central bank Governor Murat Cetinkaya and will hold a teleconference with international investors on Sunday. “Turkey is normalizing rapidly after the coup attempt was repelled by the nation. Our country’s macroeconomic foundations are solid.”

In addition to guaranteeing liquidity, the central bank said it would support the lira by removing the limits on foreign currency deposits that commercial lenders are allowed to use as collateral.

Though quashed within hours, the failed takeover threatens to destabilize an economy that depends heavily on capital inflows to finance its current-account deficit. Erdogan’s increasingly authoritarian streak was already worrying investors as he pushed his top economic advisers one-by-one from office, stoking fears of policy mistakes and leading to a drop in foreign investment.

Falling Investment

Of the $15.8 billion foreigners poured into Turkey in the first five months this year, net direct investments accounted for only $2.3 billion -- down 50 percent from the same period a year ago -- with the remainder coming from inflows of hot money into stocks and bonds, as well as other investments including loans to banks and companies.

That “will now surely reverse, causing inevitable market distress,” Michael Howell, managing director of CrossBorder Capital, said in an e-mail.

Turkey had geopolitical risks for investors to consider before Friday, including Erdogan’s intensifying military campaign against autonomy-seeking Kurds in the country’s southeast. The president has also committed the army to an active and perilous role in Syria’s war, with an estimated 3 million refugees crossing over the border into Turkey.

Meanwhile, Erdogan has been adding more executive powers to what was a traditionally presidential office, undermining investor confidence in his government’s ability to deliver growth. He and his allies were strong critics of the central bank under Cetinkaya’s predecessor Erdem Basci, and the president has removed from office all but Simsek from the group of officials who oversaw the nation’s rapid growth era at the start of the century.

Stalling Growth

Growth has averaged 2.6 percent a year since the 2009 recession, compared with 6 percent over the previous six years, with Erdogan’s AK Party in power throughout. Gross domestic product has remained around $10,000 per capita since 2008.

Erdogan embarked on a swift crackdown on opponents in the aftermath of the coup attempt, which left 165 people dead. Justice Minister Bekir Bozdag said Sunday that more than 6,000 people have been detained.

Defense Minister Fikri Isik told Haberturk television on Sunday that Incirlik Air Base, used by the U.S. in its fight against Islamic State, is operational. Eleven soldiers, including base commander General Bekir Ercan Van, and a police officer at the base have been arrested for their complicity in the coup attempt, according to a text message from the president’s office.

Erdogan said on Sunday he asked the U.S. to extradite an Islamic cleric, Fethullah Gulen, who is accused by Turkish authorities of being the ringleader behind the coup attempt. Turkey has long sought action against Gulen, who’s been living in the U.S. for more than 15 years. Gulen denied any connection with the coup.

--With assistance from Onur Ant To contact the reporters on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net, Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net, Gregory Viscusi in Paris at gviscusi@bloomberg.net. To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Stuart Biggs, Amy Teibel