Money and Markets

The Turkish lira is sinking so fast it risks 'smashing into the ground' — and people are worried about European contagion

Business Insider US

Turkish Treasury and Finance Minister Berat Albayrak holds a press conference to announce 'framework for a new economic model' in Istanbul, Turkey on August 10, 2018. Photo Berk Ozkan/Getty Images)
  • The Turkish lira has fallen more than 10% against the dollar after a Turkish delegation in Washington failed to prevent US sanctions.
  • There are concerns that contagion could spread to Europe. The euro remains at 1.13 against the dollar on Monday.
  • The lira "is falling so fast that a parachute is the first thing that comes to mind to prevent the lira smashing into the ground," Bart Hordijk, a market analyst at Monex Europe, told Business Insider.
  • Turkey’s finance minister promised a plan to calm the markets would be unveiled on Monday. 

The Turkish lira hit an all-time low against the dollar on Friday, and there are growing concerns that the country's economic troubles could spread to the eurozone.

The lira saw some wild moves in early Monday trade, selling off 10% at the open before a rally and another fall. Markets remain unclear on any response from the government in Turkey — where President Recep Tayyip Erdogan has been widening his control over economic policy — following Friday's events.

It has fallen by over 35% this year. The fall has come as Erdogan has moved to take greater control of monetary policy.

UPDATE: 'Clear risks of contagion': European markets drop as Turkey's lira crisis spreads around the world

The recent plunge comes after a Turkish delegation in Washington failed to stop the US from imposing sanctions against two senior ministers. The lack of central-bank action to support the currency is also spooking investors and Erdogan's previous comment that interest rates are the "mother and father of all evil" hasn't helped.

The lira "is falling so fast that a parachute is the first thing that comes to mind to prevent the lira smashing into the ground," Bart Hordijk, a market analyst at Monex Europe, said in an email.

Markets Insider

The drop in the lira was closely followed by a precipitous drop in the value of the rand, which breached R15 to the dollar at one point over the weekend, before recovering somewhat by Monday morning. 

The rand/dollar exchange rate over the past week. (Markets Insider)

Concerns are mounting that the decline will start to hit European banks. The eurozone's chief financial watchdog has become increasingly concerned about the exposure of some of Europe's biggest lenders to the country. They include BBVA, UniCredit, and BNP Paribas, and the exposure to those lenders is being closely watched, the Financial Times reported.

The risk of contagion saw the euro fall by 0.5% against the dollar to 1.1471 on Friday. On Monday it stands at 1.13 against the dollar.

Erdogan and his newly appointed finance minister, Berat Albayrak, promised a plan to calm the markets would be unveiled on Monday, reported the Financial Times. Erdogan has promised a new economic model driven by Albayrak, who is also his son-in-law.

Erdogan spoke briefly on Thursday night and alluded to problems with the currency, saying "various campaigns" were underway, adding: "If they have dollars, we have our people, our righteousness and our God."

Hordijk said in an email: "President Erdogan is the elephant in the room ... It is time for Erdogan to face reality.”

A "gigantic rate hike" of at least 500 basis points to calm markets and a clear commitment from the Central Bank of Turkey to support the currency could help halt the decline, Hordijk said, adding, "Another bandage to stop the lira from bleeding to death would be capital controls, but Erdogan opposes these measures."

He continued: "A painful admittance that his powers are outmatched by the forces of markets and that he may have misjudged the economic situation may be a lot to ask of the autocratic leader Erdogan, but the alternative is that the lira will meet the ground at terminal velocity; an impact that will damage the Turkish economy for years to come."

More on the Turkish meltdown and its impact:

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