Turkey’s lira rebounded from its biggest retreat in eight years after the government thwarted a coup attempt that erupted Friday. Bonds tumbled as the cost of insuring the country’s debt soared, while shares in Turkish Airlines and banks led a slump in stocks.
The currency gained 2 per cent to 2.9553 per dollar as of midday in Istanbul, trimming Friday’s 4.6 per cent decline, as traders said local investors were selling dollars to take advantage of Friday’s selloff. The Borsa Istanbul 100 Index, which had closed before the clashes began, dropped as much as 5.2 per cent. Yields on 10-year government bonds soared 44 basis points.
The crisis has undermined a recovery in Turkey’s assets driven by a slowdown in inflation and confidence central banks around the world will keep pumping cash into the biggest economies. That means any rebound this week driven by bargain-hunting will probably be short-lived, given a resurgence of political risk, according to Piotr Matys, a strategist for emerging-market currencies at Rabobank in London.
“The damage has been done,” Mr Matys said, adding that events were “seriously challenging” an earlier forecast that the lira would stay below 3 per dollar this year. “We expect Turkish assets to be vulnerable in the short term and the lira to remain volatile in the coming days. If the rule of law and checks and balances are seriously undermined in the coming months, this could lead to capital outflows.”
Goldman Sachs Group lowered its forecasts for the lira over the weekend, saying the currency will slide to 3.10 per dollar within three months, revising its earlier forecast of 2.95.
“While the immediate level of uncertainty has been sharply reduced post the failure of the takeover and a renewed coup appears unlikely, we expect the level of political risk will remain elevated and hence have implications for the economy,” Clemens Grafe, a Moscow-based economist at Goldman, wrote in a report.
In an effort to quell investor concern, policy makers said Sunday they will provide unlimited liquidity to banks and would support the lira by removing limits on foreign currency deposits that commercial lenders are allowed to use as collateral. While the coup attempt may have a negative impact on Turkey, especially on tourism, reforms will now be easier to carry out, Deputy prime minister Mehmet Simsek said in an interview.
The central bank is scheduled to hold a policy meeting Tuesday and the median estimate of economists surveyed by Bloomberg as of Friday was for a further 50-basis-point reduction in the overnight lending rate.
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