Lira Heads for Crisis Mode on Eve of Erdogan's Election Speech

(Bloomberg) -- Turkey is entering the throes of a full-blown currency crisis.

The lira suffered its biggest loss in almost a decade Wednesday on a closing basis as trader confidence in the central bank’s willingness to halt its slide all but evaporated. It sank as much as 5.2 percent, nearing an unprecedented low of 5 per dollar, and was 3.8 percent lower as of 3:41 p.m. in Istanbul.

Policy makers “must hike now,” said Cristian Maggio, the head of emerging-market strategy at TD Securities in London. “There’s no limit to how far this could go because this is becoming a currency crisis.” Eventually, Turks will start selling too, and then there will be “total loss of confidence,” he said.

The lira has fallen every day but three during May, putting it on course for its worst month in a decade, as the combination of the strengthening dollar, a widening current-account deficit and a central bank reluctant to act rattles investors. The latest turmoil was triggered when President Recep Tayyip Erdogan, who has long opposed interest-rate increases, said this month he intends to take more responsibility for monetary policy if he wins the June 24 election.

With policy makers on the sidelines, traders will be looking for a response from Erdogan when he speaks in Ankara tomorrow to formally kick off his election campaign.

Lira Heads for Crisis Mode on Eve of Erdogan's Election Speech

The retreat underscores a more global switch in sentiment toward the most vulnerable emerging markets as the dollar and U.S. Treasury yields rise. The lira has lost 17 percent of its value versus the dollar this month as currencies across developing nations declined, followed closely by the Argentine peso. The Argentine central bank has raised rates to 40 percent to help support the currency.

Commerzbank AG’s London-based analyst Tatha Ghose said the central bank needs to raise its late liquidity lending rate to a minimum of 20 percent. Meanwhile, Devan Kaloo, the global head of equities at Aberdeen Standard Investment, said it’s a matter of time before Erdogan concedes and allows borrowing costs to rise.

Contagion Danger

The projected carry return on the lira, based on the interest-rate differential adjusted for funding costs and expected swings, plunged to the lowest since January 2017. Even Japanese margin traders, who until recently were doubling down on their Turkish bets, have been cutting their losses.

While Turkey’s domestic issues don’t apply to other emerging markets, Mark Mobius, a near perennial bull on the asset class, says there’s a risk of contagion if the situation deteriorates.

“We still could have some downside in the emerging markets,” Mobius, founder of Mobius Capital Partners LLP, said in a Bloomberg television interview.

With the exception of South Korea’s won, all emerging-market currencies fell, dragging a gauge that tracks them down 0.3 percent.

‘Symptom’ of a Crisis

The lira’s drop is increasing the debt burden for Turkish companies. They now need to pay about 600 million lira ($124 million) more for foreign-currency notes maturing in the next few months than they did in early April, according to data compiled by Bloomberg.

Lenders including Turkiye Garanti Bankasi, Turkiye Is Bankasi and Turkiye Vakiflar Bankasi dominate the list of borrowers, with securities coming due through late August.

Lira Heads for Crisis Mode on Eve of Erdogan's Election Speech

Still, Borsa Istanbul, the nation’s stock exchange, said there’s no economic data that justifies the lira’s depreciation. It attributed the decline to “speculative approaches” aimed at putting Turkey’s economy in a negative light.

Read More: Istanbul Bourse Makes Patriotic Switch to Liras in Meltdown

“Of course the government refuses to acknowledge the facts at this point of the crisis,” Ulrich Leuchtmann, a Frankfurt-based analyst at Commerzbank AG, said in an emailed report. “That is part of the usual development of such a crisis.”

The lira traded as low as 4.9253 per dollar before easing back to 4.8548. Its implied volatility over the next month soared to the highest in nine years, eroding the currency’s appeal to arbitrage traders.

The benchmark Borsa Istanbul 100 Index declined 1.3 percent, led by a 2.6 percent drop in Turkcell Iletisim Hizmetleri AS. The yield on the nation’s dollar bonds due 2028 climbed two basis points to 7.34 percent.

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