By Mike Bird and Jon Sindreu
The Turkish lira tumbled Friday, a shock that set off sharp
falls in other emerging-market currencies, hit the euro and
European banks, and pushed the dollar to a one-year high.
Investors have for months questioned Turkey's financial health
and ability to repay its foreign debts. Until Friday, those
concerns had shaken only Turkey directly, but they have now spread
into the wider market.
By midday in Europe, fears of market contagion appeared
contained. But the sharp moves recalled for some investors previous
episodes when trouble in countries such as China and Greece have
fed wider market anxiety. Emerging markets were already grappling
with a stronger dollar and fears over U.S. sanctions hurting global
trade.
On Friday, some developed markets were hit. The Stoxx Europe 600
Index fell 1.1%, with its banking subindex declining almost 3%. The
euro dropped 0.5% against the dollar to its weakest level since
July 2017. Futures pointed a 0.5% opening fall for both the S&P
500 and Dow Jones Industrial Average.
Haven assets like the Japanese yen, as well as U.S. and German
government bonds, gained amid the turmoil.
The WSJ Dollar Index, a measure of the greenback's strength
against a range of trading partners' currencies, rose 0.5%.
Investors have previously seen Turkey's large dollar-denominated
debts as an internal problem, said Sean Callow, currency strategist
at Westpac. "That seems to have changed," he added.
On Friday, the lira fell more than 12%. The sudden drop was
likely due to international investors stepping out of Turkey amid
"very thin" Asian summer trading, said Claudia Calich, an
emerging-markets fund manager at M&G Investments, who has long
been biased against Turkish assets.
The lira was down 18% on the week and 39% on the year. Turkish
sovereign bonds sold off, with yields on 10-year debt trading at
around 20%, compared with 19% Thursday and roughly 12% at the start
of May.
After recouping some of its losses Friday, the currency dropped
again to a 10% loss against the dollar when Turkish President Recep
Tayyip Erdogan addressed a crowd of his supporters, striking a
confrontational stance and asking Turks to exchange "any dollars,
any euros or gold" for the domestic currency in order to shore up
the lira. "Hopefully we will overcome this disaster and we will
also successfully overcome this economic war," he said.
"If they have their dollars, but we have our people, our
righteousness, and our God," Mr. Erdogan had said a day
earlier.
For money managers, this is a sign that the Turkish government
is unlikely to announce the measures needed to assuage markets,
such as allowing the central bank to raise interest rates sharply
or asking for an International Monetary Fund bailout.
Among Turkey's problems, the U.S. recently sanctioned two
Turkish ministers because the country is holding an American pastor
for what Washington believes are politically motivated reasons.
Analysts and investors are particularly concerned about the
dependence of Turkish companies and banks on short-term
foreign-currency borrowing.
Turkey's external debt as a percentage of gross domestic product
is above 50%, one of the highest among developing economies, and
the ability of its foreign-reserve pot to meet those demands is one
of the weakest, figures by the World Bank and the IMF show.
European banking shares dropped Friday after it emerged that the
European Central Bank is examining their exposure to Turkey. Shares
in Spain's BBVA SA fell 6.6%, France's BNP Paribas SA dropped 5.5%
and Italy's UniCredit SpA slid 5.8%.
The ECB's banking watchdog is monitoring the situation in Turkey
and is in contact with eurozone banks about their exposures to the
country but its concern isn't too high at this point, according to
a person familiar with the matter.
Data from the Bank for International Settlements shows that
banks in Spain, France and Italy had the highest exposure to the
Turkish economy at the end of the first quarter, adding up to $81
billion, $35 billion and $18 billion, respectively.
The broader impact of a weaker Turkish economy is expected to be
small. Carsten Hesse, economist at German bank Berenberg, said that
even a 20% fall in eurozone exports to Turkey would only subtract
only 0.1 percentage point from the bloc's growth.
Still, some fund managers are concerned that fears about Turkey
will trigger outflows from other emerging-market countries and push
the dollar even higher.
Global markets have in the past reacted to financial stress even
in relatively small economies when other countries' banks and
financiers are involved.
In 2008, the collapse of Icelandic banks left many investors
around the world either holding near-worthless assets or with
deposits frozen and inaccessible for years. During the eurozone's
sovereign-debt crisis between 2010 and 2015, concerns over the
financial frailty of Greece hit markets world-wide. A limited
depreciation of China's currency in 2015 also sparked stock market
selloffs.
Some other emerging-market currencies also weakened Friday, with
the South African rand and the Hungarian forint falling 0.7% and
1%, respectively. The Russian ruble hit a two-year low.
Charlie Robertson, global chief economist at Renaissance
Capital, believes that despite Friday's commotion, the longer-term
"contagion effect" would be limited.
Turkey's small presence in the widely tracked MSCI Emerging
Markets index meant investors won't be forced to sell assets in
other developing nations to raise cash or lock in profits, he
said.
But investors are now monitoring what the Turkish government
will do to stem the rout, with Finance Minister Berat Albayrak --
Mr. Erdogan's son-in-law -- scheduled to disclose plans for a "new
economic model" later Friday.
"They're going to need the IMF, and the sooner the better," said
Paul McNamara, investment director for emerging market debt at GAM
International Management.
James Glynn, Saumya Vaishampayan, David Gauthier-Villars and Tom
Fairless contributed to this article.
Write to Mike Bird at Mike.Bird@wsj.com and Jon Sindreu at
jon.sindreu@wsj.com
(END) Dow Jones Newswires
August 10, 2018 08:50 ET (12:50 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.