Turkey

Turkey’s economic troubles are reverberating in a market for short-term investors all the way across the Eurasian continent in South Korea, Bloomberg News reported. Investors pulled 8.7 trillion won ($7.8 billion) from mutual funds dealing in short-term debt and other cash-like instruments on Friday, the biggest single-day outflow ever from such products, according to the latest data from the Korea Financial Investment Association.

In a related story, Bloomberg News reported that Turkish banks may have to pay up once again as they rush to meet $6 billion of financing deadlines amid the country’s worst economic crisis in years. At least nine lenders have to complete annual dollar loan syndications by year-end, leaving an industry heavily reliant on overseas funding little time and few options to conclude deals often involving dozens of global banks.

The Turkish lira is due for a reality check on Monday. August inflation data will probably show another big jump, this time to an annual rate of more than 17 percent, according to a Bloomberg News survey. Ouch. The principal cause of the lira’s weakness has been the central bank's refusal to put interest rates high enough to contain runaway consumer prices, a Bloomberg View reported. So, on Monday, everyone will get a nice reminder that policy makers haven’t acted quickly enough to control inflation. They’ll also get a sense of where price gains are headed, and here the picture looks grim.

The lira crisis has faded from the headlines, but the Turkish government’s stopgap measures to halt the hemorrhaging will not fix what ails the economy, a Bloomberg View reported. There are other crises around the corner: Foreign capital flows financing the country’s massive current account deficit have dried up following the row between President Donald Trump and President Recep Tayyip Erdogan over the fate of Andrew Brunson, the American pastor jailed by Turkish authorities. The heavily indebted corporate sector, especially real-estate and construction companies, are hanging by a thread.

Turkey’s central bank took steps to undo some of the emergency support it provided to its banks in recent weeks, reviving investor concerns over the nation’s financial stability as the Turkish lira continued its slide against the dollar, The Wall Street Journal reported. Ratings firm Moody’s also rattled investors by downgrading 18 Turkish banks on fears they will face growing difficulties in difficulties in refinancing foreign-currency loans. “There is a heightened risk of a downside funding scenario,” the ratings agency said in a research note.

The German government is considering providing emergency financial assistance to Turkey as concerns grow in Berlin that a full-blown economic crisis could destabilize the region, German and European officials said. While the talks are at an early stage and may not result in any aid, the possibilities being discussed range from a coordinated European bailout similar to the kind deployed during the eurozone debt crisis to project-specific loans by state-controlled development banks and bilateral aid, The Wall Street Journal reported.

Turkey’s financial trouble has claimed some distant victims: small investors in Japan, who have dabbled in emerging-market assets to escape superlow domestic returns, The Wall Street Journal reported. The upset illustrates the appetite for risk among an army of punters often dubbed “Mrs. Watanabe,” after the stereotypical Japanese homemaker. Last year, Deutsche Bank researchers said these buyers had fueled a rally in bitcoin and made up half of global foreign-exchange trading using borrowed money.

Turkey’s market mayhem came as no surprise to many emerging-market veterans. What investors may be underestimating, though, is the contagion risk for Brazil, according to Carmen Reinhart, the Cuban-born economist whose warning in May of perils to come proved prescient, Bloomberg News reported. "Do I think Turkey will turn into a major contagion episode? I think a key answer is what happens in Brazil," the Harvard professor said in an interview, citing high liquidity, political uncertainty and a debt-to-GDP ratio not seen in two centuries.

Funds run by a host of blue-chip financial houses, including Fidelity and Goldman Sachs, were among those with a significant bet on Turkish debt as the country’s currency crisis deepened after the re-election of president Recep Tayyip Erdogan, the Financial Times reported. Although the Turkish lira ended the week up about 5 per cent, the currency is still down 33 per cent since the start of July, while Turkish equities and bonds have fallen sharply as a diplomatic row with the US adds to investors’ longstanding concerns about the economy’s imbalances and runaway inflation.

Turkey’s attempts to stabilize its embattled financial markets have borne some fruit this week, sparking a relief rally in the lira, but investors are still looking for ways to hedge against any new shocks, The Wall Street Journal reported. The lira has gained around 24% against the dollar over the past three days after it hit a record low on Monday. The rally came after Qatar announced a $15 billion support package and Turkey’s banking regulator moved to limit the amount of the local currency banks can swap for foreign currencies with counterparts.