The Turkish stock market has fallen dramatically as the country struggles to contain another currency crisis.
The country’s Borsa Istanbul 100 index fell by 6.3 per cent today as investors reacted nervously to apparent government intervention in the economy to avert a lira crisis of the sort seen in August 2018.
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Some economists believe that Turkish banks have come under government pressure to stop foreign investors shorting the lira, meaning betting on its devaluation, in the run up to local elections on 31 March.
Turkey’s so-called offshore overnight swap rate – the cost to investors of borrowing lira using foreign currency overnight – rose to 1,000 per cent today after rising to 300 per cent yesterday, compared to 23 per cent last week. Short sellers use the overnight rate to make profits by buying back lira for cheaper than they sold it.
Investors who need lira to make profits have been forced to sell Turkish stocks to gain access to the currency, analysts say.
The lira came under pressure last week as investors looking to dodge risk sold emerging market currencies. It was also squeezed by worries about a return to strained relations with the US surfaced over the issue of the Golan Heights and fears about the government loosening economic policy ahead of Sunday’s elections.
“It's clear that while things have been quite calm in Turkey it's still one of they emerging markets that's very vulnerable to bouts of risk aversion,” said William Jackson, chief emerging markets economist at Capital Economics.
“People had been quite optimistic about Turkey since perhaps about November of last year,” he said. “We'd also seen the current account deficit, which is essentially a sign of how much Turkey depends on foreign capital flows, narrow and become a surplus.”
He added: “We're now seeing some of these drivers of the period of calm unwind, particularly growing concerns about policy making. Perhaps a bit of attention now may start to focus on the very large external debts that there are in the economy, and the foreign capital flows Turkey still needs to attract to roll those over.”