Although still significantly stronger than a few weeks ago, the lira has slumped to 6.3 against the dollar on Wednesday mid-morning, a low not seen in around two weeks.
The main catalyst for the move lower appears to be the decision of ratings agency Moody's on Tuesday to downgrade the credit rating of 20 Turkish financial institutions. In downgrading the banks, analysts from Moody's cited what they called a "substantial increase in the risk of a downside scenario," for Turkey's lenders.
"There is a heightened risk of a downside funding scenario, where a deterioration in investor sentiment limits access to market funding," Moody's said, noting that "Turkish banks are highly reliant on foreign currency funding."
The note, authored by vice president/senior analyst Carlo Gori and MD/financial institutions Sean Marion, suggests that the Turkish banking sector faces a potential funding crisis:
"In the next 12 months around USD77 billion of foreign currency wholesale bonds and syndicated loans, or 41% of the total market funding, needs to be refinanced. The Turkish banks hold around USD48 billion of liquid assets in foreign currency and have USD57 billion compulsory reserves with the Central Bank of Turkey, which would not be entirely available."
"In a downside scenario, where investor sentiment shifts, the risk of a prolonged closure of the wholesale market would lead most banks to materially deleverage, or to require external funding support from the government, or the Central Bank."
Issues in Turkey started in early August when the Trump administration placed a series of sanctions against Turkey in retaliation for its refusal to release Andrew Brunson. Brunson is an American pastor detained by Turkish authorities for his alleged support for the outlawed Kurdistan Workers Party and the Gulenist movement, both of which are accused of being involved in 2016's failed coup against President Erdogan.
Those sanctions include the announcement of a doubling of tariffs on metal imports into the US from Turkey, which was the initial catalyst for the great turmoil in financial markets over the past few weeks.
At one point during the worst of the crisis, the lira was down more than 40%.
The lira's collapse has plunged the entirety of the emerging market space into chaos, and has dragged the rand down with it. The rand lost more than 9% of its value in the past month.
The rand lost more than a percent on Wednesday morning, and was trading at R14.37/$.
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