Turkish lira dives deeper after Erdogan calls for deportations

ISTANBUL (Reuters) – The Turkish lira fell to a new all-time low of 9.85 on Monday after President Tayyip Erdogan said he ordered the expulsion of ambassadors from the United States and nine other Western countries, thus risking a diplomatic rupture.

Concerns about the possible fallout for foreign investment, combined with unease over the surprisingly steep rate cut by the central bank last week, fueled market volatility and pushed Turkey’s dollar sovereign bonds down.

After hitting the all-time low against the dollar overnight, the pound rebounded to 9.765 by 0941 GMT, still 1.7% lower than Friday’s close at 9.5950.

On Saturday, Erdogan said he asked his foreign ministry to expel the ambassadors for calling for the release of businessman and philanthropist Osman Kavala, who has been detained for four years without being sentenced.

As of Monday morning, there was no indication that the Foreign Ministry had yet carried out the president’s instructions, which would open the deepest rift with the West in Erdogan’s 19 years in power.

The president will chair a cabinet meeting at 3 p.m. (1200 GMT), during which decisions could be made on whether to move forward. Usually, Erdogan issues a statement after meetings, around 4:00 p.m. GMT.

“In addition to deteriorating fundamentals, tensions with the West are likely to continue to rise after President Erdogan says ambassadors from ten countries are no longer welcome in Turkey,” said Win Thin of Brown Brothers. Harriman.

Separately, state lenders Ziraat Bank, Vakifbank and Halkbank cut lending rates by up to 200 basis points, confirming a Reuters report on Sunday citing people with knowledge of the matter.

Analysts said the move could support some borrowers, but also exacerbate pressure on the pound and the economy, as Turkey’s benchmark bond yields rose after the central bank cut its key rate by 200. 16% points last week.

BACK TO MARS LEVELS

The pound has lost 24.5% of its value so far this year in a sell-off that accelerated after central bank policy eased, despite rising inflation, in a shocker move described as reckless by opposition economists and lawmakers.

“The central bank is making it clear that growth takes precedence over inflation,” Thin said.

Another rate cut is likely at the next policy meeting on November 18, although inflation is expected to accelerate due to the fall in the pound and rising energy prices, he said. added.

As the sell-off continued, Turkish credit default swaps, which insure against default, hit their highest level since March, as did the pound’s implied volatility gauges.

Turkish dollar sovereign bonds suffered sharp declines, with yields approaching 8% on a number of outstanding debts, according to Tradeweb data.

The spreads of Turkish hard currency bonds against US Treasury bonds on the JPMorgan EMBI Global Diversified Index climbed to 537 basis points – the highest level in seven months.

Erdogan’s political opponents said his call to expel the ambassadors was an attempt to distract from Turkey’s economic woes, while diplomats hoped the expulsions could still be avoided.

“I’m worried… for the Turkish financial markets on Monday. Reading it will inevitably come under extreme selling pressure, ”said Tim Ash, seasoned emerging markets observer at BlueBay.

“And we all know that (Central Bank Governor Sahap) Kavcioglu does not have a mandate to raise rates, so the only defense will be to spend the foreign exchange reserves that the CBRT does not have,” a- he declared.

(Additional reporting by Jonathan Spicer in Istanbul and Karin Strohecker in London; Editing by Shri Navaratnam and Uttaresh.V)


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