Turkey’s lira and stocks slumped the most in emerging markets and foreigners dumped the nation’s debt on concern the showdown between the government of Prime Minister Recep Tayyip Erdogan and the judiciary would worsen.
The currency weakened as much as 2.3 percent to 2.1764 against the dollar, before trading at 2.1605 at 3:32 p.m. in Istanbul. The lira slid as much as 3.5 percent versus the euro to a record 3.0151. The Borsa Istanbul 100 Index fell 3.6 percent, the most among 94 equity gauges tracked by Bloomberg, to 62,254.91, the lowest level since July 2012. Two-year bond yields climbed above 10 percent for the first time since August.
Foreigners have sold Turkish debt at the fastest pace in two years as a corruption probe ensnared Erdogan’s Cabinet and led to three ministerial resignations. The top administrative court Friday blocked Erdogan’s order requiring the government to be notified of investigations. Before the ruling, Justice Minister Bekir Bozdag, appointed two days ago, said a body representing prosecutors and judges had overstepped its bounds.
“There’s zero predictability,” Cuneyt Paksoy, an investment committee member at Rhea Portfolio Management in Istanbul, said Friday by phone. “The market is questioning the anchor of political stability, which was the key driver for Turkey’s lift to investment grade.”
Turkey, whose more than $800 billion economy is the largest in the Middle East, won investment-grade standing at Fitch Ratings Ltd. and Moody’s Investors Service since November 2012 after the country’s economy more than tripled in size in nominal terms over Erdogan’s 10-year leadership. The majority Muslim country, the region’s only member of the North Atlantic Treaty Organization, shares borders with Syria, Iraq and Iran.
Yields on the government’s two-year notes jumped 57 basis points, or 0.57 percentage point, to 10.3 percent Friday, the highest level on a closing basis since January 2012, according to data compiled by Bloomberg. International investors pared their holdings of Turkish debt by $532 million to a three-month low of $53.8 billion in the week through Dec. 20 after selling a net $1.38 billion the week before, the central bank said Thursday.
The lira has lost almost 18 percent of its value against the dollar this year, the worst performer in emerging Europe and Africa after South Africa’s rand, according to data compiled by Bloomberg. It’s weakened more than 21 percent versus the euro in the period.
To prop up the currency, Turkey’s central bank said this week it would sell at least $6 billion at auctions through the end of January and make it more costly for lenders to park foreign currencies in the bank’s coffers. It plans to offer $450 million Friday.
Policymakers will need to pump $1 billion or $2 billion into the market if they want to “throw water to the fire,” Arda Kocaman, the head of treasury at Finans Invest in Istanbul, said by email. “There’s panic, there’s no liquidity.”
Turkish assets have come under pressure since police arrested the sons of three Turkish ministers and the chief executive officer of Turkiye Halk Bankasi AS last week in a probe into bribery, money laundering, gold smuggling and rigging of government tenders. All three ministers resigned, with Environment and Urban Works Minister Erdogan Bayraktar urging the prime minister to step down, saying he approved the projects under question.
Erdogan, who labeled the probe as an attempted coup, responded to the crackdown by replacing 10 ministers in his 26-member Cabinet this week, after earlier dismissing some 500 police chiefs. The events highlight the growing struggle between the government and followers of a U.S.-based imam, Fethullah Gulen, who Erdogan’s supporters blame for instigating the crackdown.
The preacher, whose followers are influential in the judiciary and police forces, broke with Erdogan this year, ending a partnership that had helped sustain the single-party government since 2002.
Turkey’s Supreme Board of Judges and Prosecutors said Thursday that a regulation passed last week requiring prosecutors to inform certain superiors of their investigations was unconstitutional. Bozdag, the justice minister, said the statement amounted to “interference” and violated the constitution.
Three-month implied volatility on the currency rose some 5 percent Friday to 13.95 percent, the highest level since September.
The central bank, which has resisted increasing interest rates to stem the currency’s slide as it seeks to spur economic growth, should “raise interest rates as this is no time for the luxury of unconventional central banking,” Julian Rimmer, a broker at London-based CF Global Trading U.K. Ltd., said by email Friday.