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.
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.
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.
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.
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:
Receive a single WhatsApp every morning with all our latest news: click here.
Also from Business Insider South Africa: