Turkey pledges action to calm markets

The lira plunged to a fresh record low of 7.24 against the dollar during in Asia Pacific trade where markets were opening for Monday morning. Ismail Ferdous  Bloomberg

The lira plunged to a fresh record low of 7.24 against the dollar during in Asia Pacific trade where markets were opening for Monday morning. Ismail Ferdous Bloomberg

But there are fears that Mr Erdogan, who is famously averse to interest rate rises, may be pressuring the central bank not to act.

US stocks dropped on Monday as global jitters due to Turkey's plummeting currency spread to Wall Street.

It comes after the Turkish currency fell to a new low of 7.2 lira to the dollar, dragging the MSCI world equity index, which tracks shares in 47 countries, down 0.6 per cent as markets opened.

Erdogan had on Saturday described interest rates as a "tool of exploitation", in remarks that may not be warmly welcomed by the markets. "They should give up the priest immediately, they should have put him on the plane with the last delegation to the USA and said: 'Here, take him'".

Over a third of Turkish banks' lending is in foreign currencies, according to Reuters. Emerging market currencies and equities have also fallen in value since Friday, while investments seen as safe havens, such as the USA dollar, Treasury bonds, gold and the Japanese yen have strengthened.

Already on Monday, Indonesia's central bank intervened to defend the rupiah while India's central bank was seen intervening after the rupee hit a record low.

The moves are meant to grease the financial system, ease worries about trouble at banks and keep them providing loans to people and businesses.

In an interview with the newspaper Hurriyet, treasury and finance minister Berat Albayrak also said the government had no plans to seize foreign currency deposits or convert deposits to the Turkish lira.

The lira has now dropped some 45 percent this year.

The plunging Turkish lira is not by itself a threat, especially, as mentioned, Turkey is a minor player in the energy markets aside from acting as a transit country. The U.S. Federal Reserve continues to hike interest rates, helping to strengthen the dollar at the expense of other currencies.

Investors are anxious that Turkish companies could struggle to repay loans in dollars and euros - a debt pile that only grows as the lira falls. That makes the currency drop so much more painful as it will increase the cost of servicing debt for Turkish companies and banks and could lead to bankruptcies.

But analysts argue that the malaise of Turkey - a high-growth economy with widely-acknowledged potential and importance - goes far deeper to policy and imbalances that have been allowed to persist for too long. Stocks have fallen modestly in the USA and Europe since last week, but analysts do not see a big risk of financial turmoil. It had already fallen more than 40% in the past year.

As President Recep Tayyip Erdogan lashed out at the USA, took higher rates off the table and said he wouldn't accept an worldwide bailout, traders pushed down Turkish assets in a selloff that spilled over to other developing economies. He said it had readied an "action plan", without elaborating.

The dispute with the United States has centered on the continued detention of an American pastor who is on trial for espionage and terror-related charges. Following unsuccessful negotiations last week to resolve Brunson's case, President Trump announced on Friday that he was imposing new tariffs on Turkish steel and aluminum, sending the lira into free-fall.

"We expect the U.S. to be faithful to our traditional friendly relations and North Atlantic Treaty Organisation alliance", Mevlut Cavusoglu said in his opening speech at the 10th Ambassadors' Conference in the capital Ankara.

The ministry said Monday it initiated legal investigations against 346 social media accounts "which posted content provoking the dollar exchange rate". Erdogan said in the capital, Ankara.

Separately, the Istanbul and Ankara prosecutor's offices launched investigations into individuals suspected of being involved in actions that threaten Turkey's economic security, broadcaster CNN Turk and state news agency Anadolu reported.

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