Lira drops to record after Erdogan’s threat against envoys

In this photo from September 21, 2021, Turkish President Tayyip Erdogan addresses the 76th Session of the U.N. General Assembly at U.N. headquarters in New York City. (Eduardo Munoz-Pool/Getty Images/TNS)
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Tugce Ozsoy and Netty Ismail Bloomberg News (TNS)

Turkey’s lira fell to a record as the country’s latest diplomatic spat gave traders another reason to sell the struggling currency.

The lira weakened as much as 1.6% in early Asian trading amid thin liquidity, touching a new low for a third straight day. It stood 1.5% lower at 9.7552 per dollar at 11:33 p.m. in Istanbul on Sunday.

Already under pressure following a larger-than-expected rate cut last week, the currency encountered fresh selling after President Recep Tayyip Erdogan said on Saturday that the ambassadors of 10 nations were no longer welcome. Investors are watching for the Turkish foreign ministry to make the move official.

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“If it becomes official and those 10 ambassadors are declared persona non grata, it will batter the lira,” Haydar Acun, a managing partner at Marmara Capital in Istanbul, said earlier. “It looks like a political move to flare up international tension and boost poll ratings.”

Erdogan has long sought to portray himself as his country’s bulwark against hostile foreign powers to appeal to nationalist voters.

His call to expel the envoys of countries including the U.S., Germany and France for demanding the release of a prominent government critic coincides with opinion polls suggesting his support base is eroding as the cost of living soars.

The risk is that his rhetoric may end up worsening that fragile economic backdrop.

“His decision is likely to increase the selling pressure on the lira which will have negative consequences for inflation,” said Piotr Matys, a senior currency analyst at InTouch Capital Markets in London.

The currency has lost 23% versus the dollar this year, the worst performer in emerging markets. The lira’s one-month implied volatility rose to the highest since May on Friday.

Previous bouts of tension between Turkey and other countries — especially the U.S. — have taken a toll on lira assets, leading to wild swings in local financial markets. The country suffered a currency crisis in 2018 over the fate of an American pastor who was imprisoned in the country.

A U.S. official said the administration is aware of the reports out of Turkey and is seeking clarification from the foreign ministry in Ankara.

The latest diplomatic flare-up centers on businessman and philanthropist Osman Kavala, who has been jailed for four years in a case that’s become a test of the independence of the judiciary and the rule of law in the eyes of some foreign governments.

The spat puts Erdogan in an awkward position just a week before a Group of 20 nations summit takes place in Rome, where the Turkish president is hoping to meet with U.S. President Joe Biden.

No meeting has been confirmed yet and a new diplomatic crisis over the envoys — should they be expelled — will hardly make it easier for Erdogan to get the face time he needs to negotiate a solution to some of the earlier problems plaguing the bilateral ties.

Erdogan wants to lobby Biden to allow Ankara to buy dozens of American warplanes, in a bid to overcome Washington’s resistance to major arms deals with his country following its purchase of Russian air defenses.

Investors have become used to nationalistic rhetoric from Erdogan that often stops short of sparking a full-blown diplomatic crisis.

However, local markets are arguably more vulnerable now as foreign ownership of Turkish bonds and stocks has slumped to new lows. They hold less than 5% of local-currency government debt, down from close to 30% in 2013, and local investors can be more sensitive to swings in the political mood.

Still, Erdogan’s latest comments won’t bother foreign investors as much as the recent interest-rate moves, said Hasnain Malik, the Dubai-based head of research at Tellimer Research.

“Nearly 20% inflation and a negative real interest rate are the real problems, not Turkey’s foreign policy,” Malik said.

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