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Charles Benavidez

Charles Benavidez

Staff Writer, Safehaven.com

Charles Benavidez is a writer and editor for Safehaven.com. Charles is located in New York City and has over 5 years of experiencing covering financial…

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Investors Flee Emerging Markets Amid Lira Crisis

Istanbul

Turkey’s stock exchange closed down today, with the benchmark BIST 100 index losing 2.4 percent, taking financial stocks for a harsh ride as the lira crashed before a slight recovery as Erdogan's attempts to stabilize the economy continue to fail.

(Click to enlarge)

On Monday, the lira pulled back from its record low of 7.24 to the dollar following an announcement by the Central Bank that it would provide liquidity.

But this will only be a temporary reprieve for the beleaguered lira, which is beginning to wreak havoc on global markets.

Early on Friday, Trump announced he would double steel and aluminum tariffs against Turkey, causing the lira to lose up to 18 percent, and investors to lose what remaining confidence they had. Overall this year, the lira has lost more than 40 percent against the dollar.

And confidence is hardly being shored up by Erdogan’s interference with economic policy and his threatening of the Central Bank’s independence—a fear exacerbated by the appointment of his son-in-law as head of the ministry of finance, giving Erdogan another key lever of control. Related: There's A New Cold War Brewing In Cyberspace

At issue is the Central Bank’s refusal to raise interest rates in order to tackle double-digit inflation, with Erdogan believing that interest rates are the number one killer of the economy.

Fears over U.S. sanctions and tariffs on Turkey have had a global ripple effect, sending the Russian ruble, the Argentinian peso and the South African rand down along with it.

In the meantime, Europe’s big banks are taking on heavy losses, with the Eurozone banking equity index down 1.6 percent, representing its fourth consecutive session loss. Exposure to Turkey has seen shares in Spain’s BBVA lose more than 3 percent Monday, along with shares in Dutch bank ING and Italian UniCredit. BNP Paribas lost 1 percent Monday.

"There is a panic move on all emerging market currencies, the stress spreads on the South African rand, the Indian rupee or the Mexican peso," BusinessDay quoted analyst Alexandre Baradez from brokerage IG Group, as saying.

And global markets are reeling from the decline in the Russian ruble, too, which is under pressure from the lira as well as news of U.S. sanctions on Russia over Moscow’s alleged poisoning of an ex-spy on British soil.

(Click to enlarge)

Amid a row with Washington over an American pastor being detained by Turkish authorities, the U.S. has sanctioned two Turkish officials, with Erdogan blaming “economic terrorists” for the market sell-off. He also pledged to launch a full investigation into these “terrorists” allegedly plotting to undermine Turkey by spreading false reports.

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Moscow’s response on Monday was to announce that Russia would further decrease its holdings of U.S. Treasuries in response to sanctions. Russia had already ditched $81 billion (84 percent) of its U.S. Treasury holdings between March and May this year.

Across emerging markets, the Turkish lira is bringing others down with it. The South African rand lost more than 10 percent today, recovering slighty to 14.51 to the dollar, while the Indian rupee hit an all-time low of 69.62 to the dollar before recovering to 69.695 right after the Turkish Central Bank said it would provide liquidity.

By Charles Benavidez for Safehaven.com

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