CRISIS: Turkish Lira Down More Than 11%; The Start of Contagion Reaction in Europe

The Turkish lira has fallen as much as 11% overnight against the U.S. dollar.

By early European trading hours Friday, the lira had pared some of its losses, but still stood 6% lower. The dollar reached highs of 6.21 lira, a fresh record low for the Turkish currency.

The Turkish lira had dropped by as much as 20% during the week, as international markets soured on the country’s capacity to repay its foreign-currency debts.

Turkey’s limited stash of foreign exchange reserves could prompt it to seek a bailout from the International Monetary Fund—provided the government is ready to meet the typically strict demands of the IMF.

Turkey’s local-currency bond yield has climbed over 20%.

Click on chart for larger view.

Just after trading opened in Istanbul, the benchmark 10-year yield shot up 84 basis points (0.84 percentage points) to 20.58 percent, according to Bloomberg data.

In another sign of investor angst, the price to hedge against a default on Turkish debt by using instruments called credit default swaps (CDS) rose to its highest level since 2009. The 5-year CDS spread reached 400 bps, according to Bloomberg data.

There was some spillover into Europe. The euro dropped 0.6% to $1.145, its weakest since July 2017.

The euro’s weakness followed a Financial Times report that the European Central Bank is examining the Turkish exposure of several European banks. Three banks named in the piece tumbled, with Spain’s Banco Bilbao Vizcaya Argentaria SA falling 3.5%, Italy’s UniCredit SpA down 3.2% and France’s BNP Paribas SA down 3.8%.

Some other emerging-market currencies also weakened, with the South African rand and the Hungarian forint both tumbling. The Russian ruble hit a two-year low of 67.1518 per dollar.

-RW 

(Sources:The Wall Street Journal, The Financial Times, Bloomberg)