Turkish currency eases, stocks fall,but sanctions threat is called a joke

By Behiye Selin Taner and Ali Kucukgocmen

The Turkish lira fell back in the face of US and European threats of sanctions and embargoes, though sceptical traders said it would weaken much further if Western allies turn words into action over Turkey’s incursion in Syria.

Underlining doubts over the threats, Turkish president Tayyip Erdogan was quoted as dismissing them as “quips” over the week- end, while the country’s ambassador to the UN in Geneva called a possible EU arms embargo “a joke”.

In turn, US president Donald Trump said on Twitter that “big sanctions on Turkey are coming”. The lira slipped to 5.931 against the dollar, its weakest since May 30. Turkish stocks and bonds also tumbled, with the main share index at its lowest level since June. The cost of insuring government bonds against default hit a six-week high.

The currency, which suffered a crisis last year that knocked Turkey’s economy into recession, has fallen more than 12% so far this year and 5% this month alone as Ankara and Syrian allies attacked Kurdish-led forces in northeastern Syria.

The intervention, now in its sixth day, has drawn international condemnation, including threats from Mr Trump to “obliterate” Turkey’s economy with “powerful” sanctions.

But many traders and investors said in effect they would believe it when they see it, especially after US threats earlier this year to sanction Turkey over buying Russian S-400 missile defences did not materialise.

Tim Ash of BlueBay Asset Management said:

After being led up the hill and down on the S-400 issue, markets don’t really believe that Trump has the stomach to sanction Turkey in any meaningful way

Economists said sanctions could set back Turkey’s economic recovery, especially if a prolonged battle puts pressure on Turkey’s trade ties with Europe. Turkey’s imports and exports amounted to €155bn with the EU in 2017, compared to €18bn with the US. Before the military incursion, Turkey and the US said they aimed to boost that to $100bn in annual trade.

Inanc Sozer, chief economist at Turkey Macroview Consulting, said given the sanctions threat, he would consider zero economic growth this year a “success”.

“But if the US implements sanctions next year, we will be talking about a contraction again, which may be around 5%,” he said. “The economy is very fragile and its financial markets have been weak since last year.

“Sanctions may create a feedback loop that would put manufacturers under severe pressure.”

Turkey’s calendar-adjusted industrial output, largely viewed as a precursor to growth figures, declined 3.6% year-on-year in August, more than expected, new data showed.

Data from IHS Markit showed Turkish five-year credit default swaps, of CDS, which investors and traders use as protection — rose 11 basis points to 404 basis points. Among Turkish stocks, an index of banks plunged 8%.

Last week, US treasury secretary Steven Mnuchin said that Mr Trump had authorised “very powerful” sanctions targeting Turkey, to which Turkey said it would retaliate in kind.

But in Istanbul on Sunday, Mr Erdogan was quoted as saying at a closed-door meeting with some media outlets that he expected such talk. “Of course things such as economic sanctions are being mentioned. Truthfully, I see those as quips along this process,” he said, according to the state-run Anadolu agency.

The EU has condemned Turkey’s military attack. France’s foreign minister said it must call for “a firm position” establishing an arms embargo.

In Geneva, Turkish ambassador Sadik Arslan told reporters: “That arms embargo is a joke.” Mr Arslan added that Turkey has “enough of an industrial base to substitute them with our much better systems”.

Reuters