A plunge of the Turkish lira to record lows sent shivers through global markets yesterday as investors worried about contagion, especially for the European banking sector.
The lira was buffeted by a diplomatic row between Ankara and Washington, with Turkish President Tayyip Erdogan’s attempts to talk up the currency having exactly the opposite effect.
“The plunge in the lira which began in May now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis,” said Andrew Kenningham, chief global economist at Capital Economics.
European banking stocks plunged, the euro weakened while demand for safe haven assets gold and the Swiss franc picked up as analysts realised that the lira’s plunge was not just a local Turkish problem.
London’s FTSE 100 closed 1.0% down at 7,667.01 points, Frankfurt’s DAX 30 ended 2.0% down at 12,424.35 points and
Paris’ CAC 40 lost 1.6% to finish at 5,414.68 points whereas the EURO STOXX 50 shed 1.9% at 3,426.28 points at close.
But neither should global investors over-react, suggested Kenningham, noting that Turkey accounts for just 1% of the world economy, slightly less than the Netherlands, making it not much of a risk to the world economy, or even the eurozone.
Still, analysts said the lira’s plunge which took it down nearly 20% against the dollar on the day in the European afternoon, was dramatic, with analysts struggling to recall when they last saw anything like it. And the fall may not be over.
The European single currency, meanwhile, tumbled to its lowest level in a year on concerns about eurozone exposure to the crisis in Turkey.
Concerns were amplified yesterday by a report in the Financial Times that the supervisory wing of the European Central Bank (ECB) had over the last week begun to look more closely at eurozone lenders’ exposure to Turkey.
The report said the situation is not yet seen as “critical” but Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas are regarded as particularly exposed.
More evidence that emerging currencies were having a bad day came from Russia, where the rouble dived again yesterday and is now down 5% since the US on Wednesday hit Russia with new sanctions over its alleged involvement in a nerve agent attack in Britain.
Stock markets across the world retreated as investors watched Turkey with growing unease.
Key European equity markets were down by up to 2% at the closing bell, with shares in banking giants BNP Paribas and Societe Generale more than 3% lower in Paris and Commerzbank and Deutsche Bank losing around 4% in Frankfurt.
Meanwhile on Wall Street the Dow index stood around 0.7% lower approaching midday in New York.
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