Turkey Markets Sink as Sanctions Risk Swamps Banks’ Lira Defense

(Bloomberg) -- Turkish markets tumbled amid mounting fears that punitive measures from Washington could deal a fresh blow to the Turkish economy. The lira joined the retreat, despite efforts by state banks to support the currency.

The lira broke past the 5.93-per-dollar mark even as lenders sold more than $1 billion worth of foreign exchange, according to two people familiar with the matter, who asked not to be named because because the information isn’t public. Last week, state banks sold the equivalent of at least $3.5 billion worth to support the currency, three people said.

Stocks plunged more than 5%, two-year domestic bond yields soared as much as 66 basis points and the lira’s one-month implied yield was poised for its biggest jump since March. Room for more interest-rate cuts appears to have vanished, with one-year cross-currency swaps touching 16.6%, above the central bank’s one-week repo rate.

The latest turmoil comes after U.S. President Donald Trump said Washington is ready to sanction Turkey in response to its military incursion in northeast Syria, raising the prospect of another market rout. “Big sanctions on Turkey coming!” Trump said in a separate tweet on Monday, giving way to another leg lower for the lira.

Turkey relies heavily on foreign capital inflows and is still struggling after a recession fueled by a currency crisis last year, which was partly precipitated by American sanctions.

Meanwhile, European Union foreign ministers pledged to restrict arms sales to Turkey over its military operation in Syria, calling for an immediate halt to the incursion.

The lira was trading 0.8% weaker at 5.9321 per dollar as of 3:03 p.m. in Istanbul, it’s one-month forward implied rate was close to 20% and the yield on two-year local-currency bonds trimmed its gain to 15.84%.

The threats of more sanctions were the latest in a string of warnings from U.S. officials this month, who have balked at the Turkish campaign against American-backed Kurdish militants. On Sunday, Treasury Secretary Steven Mnuchin said the U.S. could shut down all dollar business with Turkey. Last week, Republican Senator Lindsey Graham introduced a bipartisan bill to penalize Turkey in response to the incursion.

In a move that risks further muddying the picture, Syrian President Bashar al-Assad sent troops to the country’s northeast after Kurdish fighters turned to Damascus for support. Earlier this month, Trump ordered remaining U.S. forces in northern Syria to withdraw in the face of a Turkish advance.