What's going on?
Turkish investments are having a week to forget as the country gears up for local elections on Sunday.
What does this mean?
On Wednesday, the cost of borrowing Turkish lira spiked 40-fold to an eye-watering record high above 1,000%. According to reports, the government pressured Turkish banks into not lending the currency to overseas investors in an effort to prop up its price ahead of the polls – although Turkey’s banking association denied this.
Those investors were likely looking to “short” the lira and bet that its value would fall. To do this, they borrow the currency and then sell it – hoping to later buy it back on the cheap and pocket the difference. With overseas investors shut out, Turkish stocks had their worst day since last July and the return (a.k.a. yield) on government bonds jumped to 20% as their prices plunged. While trading conditions returned somewhat to normal on Thursday, the lira still fell 5% against the US dollar.
Why should I care?
For markets: Turkish flu spreads.
Last time Turkey sneezed, emerging markets from Mexico to South Africa all caught a cold. But investor selling has largely been confined to Anatolia this time around – at least so far. The recent drop in yields on super-safe investments like US and German government bonds might be cushioning the impact on emerging markets for now: bond investors seeking any kind of return at all have to take a risk in less-charted territories.
Zooming out: Turkey’s not alone.
Turkey’s central bank has used up about a third of its reserves of foreign currency this month buying lira in an attempt to support its price – but it isn’t the only one struggling. Hong Kong has burned through more than $1 billion in March trying to keep the value of the local currency pegged to its US counterpart (as it has been since 1983). But while Turkey’s reserves have dwindled to $25 billion, Hong Kong still has $435 billion in the locker.