Turkish lira dives after Moody’s downgrades Turkish banks

This chart shows the
dollar’s rise against the lira in the last week, the more
commonly used way of viewing the currency
pairing.
Markets
Insider

• Turkish lira slumps once again after Moody’s downgrades
  20 financial institutions.
• The currency had stabilized after its huge slump
  earlier in August, but is falling once again.
• By Tuesday morning, it was trading at 6.3 against the
  dollar.
• 
  
  You can follow the lira’s movements at Markets
  Insider.
  

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After a week out of the spotlight, the
Turkish lira is once again slumping Wednesday as fears over
the state of the country’s fragile financial system intensify.

Although still significantly stronger than a few weeks ago, the
lira has slumped to 6.3 against the dollar by 9.30 a.m. BST (4.30
a.m. ET) on Wednesday, a low not seen in around two weeks.

The main catalyst for the move lower appears to be
the decision of ratings agency Moody’s on Tuesday to downgrade
the credit rating of 20 Turkish financial institutions. In
downgrading the banks, analysts from Moody’s cited what they
called a “substantial increase in the risk of a
downside scenario,” for Turkey’s lenders.

“There is a heightened risk of a downside funding scenario,
where a deterioration in investor sentiment limits access to
market funding,” Moody’s said, noting that “Turkish banks are
highly reliant on foreign currency funding.”

The note, authored by vice president/senior analyst
Carlo Gori and MD/financial institutions Sean Marion, suggests
that the Turkish banking sector faces a potential funding
crisis:

“In the next 12 months around USD77 billion of foreign currency
wholesale bonds and syndicated loans, or 41% of the total market
funding, needs to be refinanced. The Turkish banks hold around
USD48 billion of liquid assets in foreign currency and have USD57
billion compulsory reserves with the Central Bank of Turkey,
which would not be entirely available.”

“In a downside scenario, where investor sentiment shifts, the
risk of a prolonged closure of the wholesale market would lead
most banks to materially deleverage, or to require external
funding support from the government, or the Central Bank.”

Issues in Turkey started in early August when the Trump
administration placed
a series of sanctions against Turkey in retaliation for its
refusal to release Andrew Brunson. Brunson is an American pastor
detained by Turkish authorities for his alleged support
for the outlawed Kurdistan Workers Party and the
Gulenist movement, both of which are accused of being involved in
2016’s failed coup against President Erdogan.

Those sanctions include the announcement of a doubling of tariffs
on metal imports into the US from Turkey, which was the initial
catalyst for the great turmoil in financial markets over the past
few weeks.

At one point during the worst of the crisis, the lira was down
more than 40%.

The lira’s collapse has plunged the entirety of the emerging
market space into chaos, with contagion
causing the likes of the South African rand, the Argentine peso,
and the Indonesian rupiah, to slump in response.