Recep Tayyip Erdogan accused other countries on Sunday of mounting an “operation” to bring down the Turkish economy, but gave no indication he would meet investors’ demands for an emergency plan to prop up the plunging lira.
Despite the danger of a deepening financial crisis, the Turkish president struck a defiant tone. He insisted Turkey would not back down after a bruising week that saw the nation’s currency lose a fifth of its value against the dollar on the back of an escalating dispute with US president Donald Trump and concerns about the management of the Turkish economy.
“What is the cause of this storm?” he asked a gathering of ruling party officials in the Black Sea city of Trabzon. “There is no economic reason . . . It’s an operation against Turkey.”
The plunging lira has piled stress on Turkish companies that are saddled with unhedged foreign currency debt and raised fears that the country will struggle to meet its large external financing needs.
The impact of Turkey’s crisis on the banking system, both domestically and across Europe, is one of the main investor concerns, with analysts worrying that the start of the trading week would see stocks joining the lira under renewed pressure.
“They need to recognise that there is a problem,” said Tim Ash, an analyst at BlueBay Asset Management. “Then they need a plan.”
Mr Ash called for a large emergency interest rate hike, a detailed fiscal programme, the creation of a “bad bank” to handle non-performing loans and a resolution of the dispute with the US.
He added: “This all needs to happen in the next 24 to 48 hours . . . With no acceptance of the problem, no programme, no international backstop where’s it going to go?”
Speaking hours before markets reopened, Mr Erdogan said that the pressure on the lira, which has lost 41 per cent of its value against the dollar this year, was a plot against Turkey and warned: “We have seen your game and we are throwing down the gauntlet . . . We will not surrender.”
The Turkish president underlined his hostility to high interest rates, claiming that they make “the rich richer and the poor poorer.” The refusal of Turkey’s central bank to hike rates despite soaring inflation and a plunging currency is widely viewed among investors as the result of political pressure from Mr Erdogan, and has stoked concern that the Turkish economy is heading for a hard landing.
For the third day running, Mr Erdogan urged Turks to take dollars, euros and gold kept under their pillows and convert it to lira to prop up the ailing currency, which on Friday fell as much as 17 per cent, a day when Mr Trump said the US would double tariffs on imports Turkish aluminium and steel.
The US move was the latest salvo in an escalating dispute over the detention of Andrew Brunson, an evangelical pastor whose fate has become the lightening rod for a host of disputes between the two Nato allies.
Mr Erdogan said on Sunday that the US had set a deadline of 6pm on Wednesday for the release of Mr Brunson, who was moved to house arrest at the end of last month after almost two years behind bars on espionage and terrorism charges. The ultimatum has not been confirmed by Washington.
The Turkish president appeared relaxed as he spoke at several events, reciting poetry and joking as he addressed ruling party officials and a crowd of supporters at an open-air rally. Analysts warned, however, that Turkey would face a spiralling financial crisis when the markets reopened.
Piotr Matys, emerging markets analyst at Rabobank, said a continued slide in the lira, coupled with shrinking confidence among Turkish households and corporates, could see a run on the country’s banks in the coming days.
He argued that without a synchronised effort from Turkey it would be “difficult to expect a respite for the battered lira and local assets”.
Ozgur Yasar Guyuldar, head of global emerging markets sales at Austria’s Raiffeisen Centrobank, said that Turkey still had the capacity to find the funding needed to keep its $880bn economy afloat. “But before they will give credit to Turkey they need to be convinced that there are effective policy tools and that the government has done its homework,” he said. “They need to sit down with creditors and explain the model they will follow to tackle the issue.”
Although many analysts see Turkey’s crisis as largely self-inflicted, they say that it has been exacerbated by the shifting global monetary environment, with the US Federal Reserve lifting rates and trimming its balance sheet. That hurts countries that depend on short-term dollar funding, according to Joachim Fels, global economic adviser at Pimco.
“This looks like yet another example of how a combination of bad domestic economic policies turning worse and deteriorating global liquidity that makes bloated dollar-funded balance sheets vulnerable can produce high volatility and contagion,” Mr Fels said in a note to clients on Sunday.
“Who said shrinking the Fed’s balance sheet and raising the funds rate in a gradual fashion wouldn’t have global repercussions?”