The Turkish lira has fallen almost 9% in early trading on Monday as investors fear the country’s financial crisis will spread to European markets.
Despite defiant words by the Turkish president Recep Tayyip Erdoğan over the weekend pledging as yet unspecified action to reverse the slide, the currency stood at 7 lira to the US dollar at 3.30amBST on Monday, a fall of 9% on Friday’s closing price.
It had earlier fallen to an all-time low of 7.24 before regaining some ground after the country’s banking regulator announced late on Sunday night that it would limit the ability of Turkish banks to swap the battered lira for foreign currency.
Asian stock markets were also down on Monday. The Nikkei in Japan lost 1.6%, Hong Kong was off 1.8%, Sydney was down 0.5% and the Taiwanese bourse fell 3%.
The FTSE100 was expected to open down 0.4% laster on Monday morning while Germany’s Dax 30 was set for a 0.8% fall.
The euro hit one-year lows on Monday as the falling lira fuelled demand for safe havens, including the US dollar, Swiss franc and yen. The Vix volatility index measuring turbuklence in financial markets – also known as the fear index – jumped 16% to 13.6 on Monday.
The lira has tumbled more than 40% this year on worries about Erdoğan’s increasing control over the economy and deteriorating relations with the United States, chiefly over the war in Syria.
A decision by a Turkish court to extend the detention of Andrew Brunson, an American pastor accused of espionage for Kurdish militants and the Gülen movement, a group accused of masterminding the 2016 coup, forced the issue into the open with Donald Trump responding last week by doubling US tariffs on Turkish steel.
Chris Weston, of online trading firm IG Market in Melbourne, warned that global markets would be on edge as investors tried to assess the impact of the crisis on European banks which have lent money to Turkey.
“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,” he said.
Analysts at ANZ bank in Australia said contagion risks centre on Spanish, Italian and French banks exposed to Turkish debt, as well as Argentina and South Africa.
“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.”
Andrew Kenningham, chief global economist at Capital Economics, 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,” he added.
On Sunday Erdoğan accused foreign countries of waging war on Turkey and said his government would respond with trade measures to reduce reliance on the dollar and US markets.
His finance minister, Berat Albayrak, who is also his son-in-law, told the Hurriyet newspaper that he had an action plan ready to deal with the crisis.
“From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market,” Albayrak said, without giving details on what the steps would be.