Market News

BY Tugce Ozsoy, Beril Akman and Firat Kozok

(Bloomberg) -- Turkish authorities are stepping in to stabilize markets after the detention of President Recep Tayyip Erdogan’s most powerful opponent sparked a sharp selloff and undermined confidence in the country’s policy path.

The lira weakened 0.7% against the dollar on Monday after last week’s 3.1% drop, while other assets fared better. Istanbul-listed stocks gained as much as 3.8% and the price of protection against non-payment on Turkish government bonds retreated from a 12-month high.

The moves come as Turkey’s top economy officials are discussing a string of measures to help defend the lira, according to people with direct knowledge of the matter. The next steps were discussed in meetings led by Treasury and Finance Minister Mehmet Simsek over the weekend, the people said on condition of anonymity as the discussions are private.

One step considered is lowering the taxes on lira deposits and funds to encourage savings in the local currency, they said. The discussions stem from a major fallout in the lira, stocks and bonds over Istanbul Mayor Ekrem Imamoglu’s arrest last week, which fueled protests. Turkish police detained more than 1,000 people at demonstrations since March 19.

“The common denominator of the steps taken is to increase the attractiveness of the lira,” said Murat Gulkan, the chief executive officer of OMG Capital Advisors. “Reducing withholding tax would have the same effect on investors as raising interest rates as the risk premium rises. In the face of these political risks, it’s vital to keep the exchange rate stable. But this comes at a cost.”

Turkish lenders increased foreign-currency sales on the market in past days, behavior typical for periods when the central bank intervenes to support the lira by selling chunks of the country’s currency reserves.

Imamoglu’s battles reminded investors of Turkish risks after the country has largely withdrawn from hand-management of various markets since mid-2023. Simsek’s push toward more orthodox economic policies, and a gradual depreciation of the lira, had been applauded by investors and helped Turkish residents reduce holdings of dollar-denominated assets.

“Policymakers have made great strides by embracing economic orthodoxy” which has led to a “broad rally as inflows accelerated,” said Mohammed Elmi, a senior portfolio manager at Federated Hermes Limited. But the mayor’s arrest has boosted the “political risk premium” and stoked concerns over “potential dollarization among locals,” he said.

The Borsa Istanbul 100 stock index gained 0.5%, after sinking 17% last week. Credit-default swaps, a barometer of risk premium associated with a country, stood at 325 basis points, slightly down from 327 basis points on Friday, the first drop in five days.

The drop in longer-term government bonds slowed down, with the yield on five and 10-year government bonds rising 22 basis points and 10 basis points to 39.41% and 33.48%, respectively. The cost of borrowing lira in the offshore market jumped to near 100% from 36% Friday before falling to 45% by afternoon.

Read: Turkey Bans Short Selling, Eases Buyback Rules to Bolster Stocks

The central bank held a meeting with commercial lenders on Sunday to discuss any potential moves and ensure coordination, Bloomberg reported. It also launched the first liquidity bill in almost two decades to vacuum lira oversupply and ensure policy stays tight.

“Volatility could ease soon but for that I think we need to see some stabilization on the political front,” said Henrik Gullberg, macro strategist at Coex Partners Ltd in London. “The steps announced should help stabilize markets but at levels still clearly higher than before.”

Anti-government demonstrators clashed with police through Sunday following the jailing of Imamoglu. The case has the potential to keep the mayor behind bars for years and prevent him from running against Erdogan in the next elections. He is the most prominent person ensnared in a wave of detentions and investigations against opposition figures.

Read: What Arrest of Erdogan’s Top Rival Means for Turkey: QuickTake

--With assistance from Asli Kandemir and Inci Ozbek.

(Updates with latest markets and analyst comments.)