Stocks Collapse In Turkey As Lira Meltdown Sparks Panic

A steep selloff in Turkish stocks tripped the Borsa Istanbul’s market-wide circuit breaker on Friday, as panic spread amid the ongoing collapse of the lira.

The central bank, which cut rates a fourth consecutive meeting this week despite knowing full well the move would worsen the currency’s already egregious slump, intervened again. It was the fifth intervention this month.

The lira depreciated past 17 (figure below). At one point Friday, it was weaker by 8% on the day.

According to SocGen, dollarization has now reached 72.9% of the banking sector.

Writing earlier this week, the bank’s Phoenix Kalen described the “pitfalls” associated with CBT’s increasingly desperate direct FX interventions. The central bank “is expending valuable reserves to defend an arbitrary exchange rate level that is indefensible considering the untenable level of real policy rates,” she said. “Furthermore, it risks fueling a further loss of confidence in the currency by exacerbating the precarious situation regarding FX reserves.”

In addition to being out of adjectives when it comes to describing how acute the situation is with the currency, I’ll admit to being at a loss when it comes to communicating how absurd the knock-on effect is for stocks.

Naturally, Turkish equities are “up” (figure below), but it’s a function of the flagging currency and soaring inflation.

Eventually, situations like this become wholly untenable because… well, because there’s a burgeoning currency crisis, and while currency crises bode ill, currency crises that spin out of control are totally ruinous by definition.

On Friday, the proverbial chickens came home to roost for the incorrigible Recep Tayyip Erdogan. Stocks re-triggered the circuit breaker after extending losses following the first halt. 10-year yields rose to the highest in a decade.

Friday’s decline on the benchmark was among the largest since the failed 2016 coup (figure below).

Note that shares suffered an even bigger one-day swoon earlier this year when Erdogan fired Naci Agbal, the hawkish central bank governor who briefly managed to restore confidence in the lira with a series of rate hikes.

The US-traded Turkey ETF notched a Friday to remember. Or a Friday to forget, depending on how you want to look at it.

After Thursday’s rate cut, the implied real rate in Turkey is negative 7%, in line with the decline in Turkish stocks to close the week.