Investors fear ripple effects as Turkish lira plunges to new low

Turkey’s currency plunged to new record lows on Monday despite efforts from the country’s central bank to stem its collapse.

The lira crashed a further 7% against the dollar, triggering renewed fears of contagion among lenders to the heavily indebted country in Europe and the Middle East.

The central bank in Ankara, led by the son-in-law of President Recep Erdogan vowed to “take all necessary measures” and pledged to provide cash for Turkish banks. The bank said it would free up 10 billion lira, $6 billion (£4.7 million), and $3 billion equivalent of gold liquidity in the financial system. However, it did not discuss hiking interest rates - a measure investors say is needed to curb its runaway inflation.

“The various non-rate hike measures announced on Monday to stabilise the currency will likely be limited in their effect,” said Connor Campbell at Spreadex, as high inflation and the lira’s heavy losses will make it hard to keep interest rates unchanged.

The lira tumbled after Erdogan blamed America for the currency’s collapse and said in a newspaper article he was prepared to ditch the US alliance.

The crisis has triggered a “risk-off” mentality among investors, whereby they are less willing to hold assets in emerging markets, and are switching to assets deemed to be safer heavens, said AJ Bell’s Russ Mould.

The impact from Turkey’s currency tumble will be felt more acutely in Italy, Turkey’s fifth-largest source of imports. Riskier assets also being hit included the South African rand, which fell 10%, while Mexico’s peso and India’s rupee were under pressure too. Banks were among the biggest losers as fears mounted about their exposure to the Turkish economy. Most UK banks are relatively unexposed, but Italy’s Unicredit, Spain’s BBVA and France’s BNP Paribas all saw shares fall 2% or more today..

Smaller UK-listed stocks exposed to Turkey and nearby emerging markets were also bruised. DP Eurasia, a franchisee of Domino’s Pizza which generates 68% of sales in Turkey, sank 14.4%.Travel operators On The Beach and Thomas Cook, which sell package holidays to Turkey, fell 4.1% and 1.9% respectively.

Georgian lenders TBC Bank brought up the rear on the FTSE 250, down 3.7%. Emerging markets-focused asset manager Ashmore tumbled 3.7%.