Has fear of the Turkish lira's volatility caused the value of the euro to fall?

  • img Harvey Cawdron
  • POSTED ON 13 Aug 2018

Claims

On Monday, the Turkish lira fell by nearly 9% in early trading and the euro reached a 1-year low as investors think that the country's current financial crisis could spread to European markets. 

The lira heavily slipped against the dollar on Monday, despite the Turkish President Recep Tayyip Erdo?an's strong insistence that he would take as yet unspecified action to prevent the fall. 

In early trading it hit an all-time low of 7.24 before being revived after Turkey's banking regulator announced on Sunday night that it would restrict the ability of Turkish banks to swap the lira for foreign currency. 

On Monday, Asian stock markets were down as well. The Nikkei in Japan fell by 1.7%, Hong Kong by 1.8%, Shanghai by 1.7%, Sydney by 0.5%, and the Taiwanese bourse by 3%. However, analysts expect Asia to survive due to large foreign exchange reserves and clever fiscal and monetary policies, according to the Express. Analysts at Singapore's DBS said 'Asia should not see any contagion effect fundamentally due to the ongoing crisis in Turkey as the region does not have a meaningful exposure to the country. We would see any meaningful correction in bond prices on the back of the Turkey developments alone, as a buying opportunity.'

It was predicted that the FTSE100 would open down 0.4% later on Monday morning while Germany’s Dax 30 was expected to fall be 0.65%. 

The euro fell by 0.3% against the dollar, to a 1-year low on Monday, as the lira crisis prompted demand for safe havens including the greenback, Swiss franc and yen. The Vix volatility index measuring turbulence in financial markets (the fear index) increased by 16% on Monday. 

Concerns were also raised that other emerging market currencies - already under pressure from the strengthening US dollar - could get caught up in the lira's decline. The South African rand decreased to a level not seen since mid-2016, the Russian rouble fell again and the the Indian rupee fell to an all-time low. 

The lira has fell over 40% this year over concerns about Erdo?an’s increasing control of the economy and deteriorating relations with the US, mainly over the war in Syria. 

A Turkish court's decision to extend the detention of Andrew Brunson, a US pastor charged with espionage for Kurdish militants and the Gülen movement, a group accused of orchestrating the 2016 coup, pushed the issue into the open with Trump countering by doubling US tariffs on Turkish steel last week. 

Chris Weston, of IG Market, an online trading firm in Melbourne, said that global markets would be on edge as investors attempted to evaluate the effect the crisis would have had on European banks that have lent money to Turkey. 

He said 'The European Union’s financial watchdog [has] expressed concern about EU financial exposures to Turkey. And so, if it is a concern for this institution, then it should be for traders too'. 

Analysts at ANZ bank in Australia claimed that those that are most at risk of contagion are Spanish, Italian and French banks exposed to Turkish debt, as well as South Africa and Argentina. 'Turkey’s massive pile of corporate debt denominated in foreign currencies, but a rapidly sliding currency – and inflation that’s threatening to go exponential – is a toxic combination', said Weston.

The chief global economist at Capital Economics, Andrew Kenningham, said 'The plunge in the lira which began in May now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis. This would be another blow for emerging markets as an asset class, but the wider economic spillovers should be fairly modest, even for the euro zone'. 

The restrictions on currency swaps announced on Sunday could be the first stage of a plan by the Turkish government to resolve the crisis. 

On Sunday, Erdo?an claimed that other countries were waging war on Turkey, and said his government would implement trade measures to decrease their reliance on the dollar and US markets. 

His finance minister and son-in-law, Berat Albayrak, told the Hurriyet newspaper that he had a plan prepared to deal with the crisis. He said 'From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market', however he gave no indication as to what these steps would be. 

Late on Sunday Garanti, a large Turkish bank, claimed it would prohibit customers from opening new foreign exchange positions, making it more difficult for people to sell the lira for US dollars, pounds and euros.  

However, some analysts are advising investors against abandoning emerging markets as a result of Turkey's struggle. According to CNN, Kerry Craig, a global market strategist at JPMorgan Asset Management, wrote in a note to clients that ' The drivers of the lira's decline are very specific to Turkey. Therefore it should not derail the positive fundamentals in other emerging markets over a longer term.'