The Daily Update - Turkey's Woes Continue

The Turkish lira continued to set record lows against major currencies overnight as the country wrestles with a crisis that is beginning to rattle other markets. The lira was down 11% at one point against the US dollar, trading at a low of 7.23, on top of the 20% the currency dropped last week. However, in spite of the nation’s predicament, the Turkish president is showing no signs of backing down. Recep Tayyip Erdogan was defiant in a speech to his supporters yesterday, proclaiming ‘I want them to know that we will not surrender. We will keep producing and we will keep increasing exports’ adding ‘We will not give in, if you come at us with your dollars then we will find other ways to do business. The US is sacrificing its 81-million-strong ally Turkey for a pastor with links with terrorists’.

The Turkish central bank has taken steps to try to ease the currency crisis by easing the rules on how commercial lenders manage their foreign-currency liquidity and lowering the amount they must have with the regulator. However there was no mention of increases in interest rates after Erdogan said there would be no surrender on interest rates ‘as long as I’m alive’.

Another currency facing headwinds because of the crisis is the euro,  after the Financial Times reported on Friday that the European Central Bank (ECB) had growing concerns about banks in France, Spain and Italy and their exposure to Turkey's troubles. According to the report, BNP Paribas SA, Banco Bilbao Vizcaya Argentaria SA and UniCredit SpA are of particular concern. Although the FT states that the ECB’s watchdog, the Single Supervisory Mechanism, does not see the situation as critical yet, the risk is that some Turkish borrowers are not hedged, leading to higher borrowing costs and defaults.

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