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Money manager concerns grow as Turkey roils

Recep Tayyip Erdogan, Turkey’s president

The plunge in the Turkish lira, debt levels and a worsening relationship between Turkey and the U.S. have money managers concerned about a full-blown crisis for the country.

The Turkish lira was down 8.5% vs. the U.S. dollar Monday.

The country's central bank said in a notice on its website Monday that it will "closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary."

The notice said that, to support financial stability and sustain the effective functioning of the markets, the central bank had introduced a number of foreign exchange and lira liquidity management measures, including allowing banks to borrow FX deposits in one-month maturity in addition to one-week maturity.

Money managers, who already were watching Turkey closely amid a trade dispute with the U.S., are worried the situation might escalate further.

"The worsening of political tensions between the U.S. and Turkey has been the final blow to an already dire economic situation, with the collapse of the lira now rapidly fueling concern of a full-blown currency and debt crisis given the amount of (U.S. dollar)-denominated debt in the private sector," said Delphine Arrighi, fund manager, Old Mutual Emerging Market Debt fund at Old Mutual Global Investors, in a reaction comment.

"Meetings between the banking regulator and the central bank over the weekend haven't yielded the results the market was expecting. Although the recent measures announced by the Central Bank of the Republic of Turkey will aim to ease onshore liquidity, they will fall short of restoring investors' confidence. At this stage, the lack of credible policy response is pushing Turkish asset prices into a tailspin."

Ms. Arrighi said local rates are now pricing in almost 900 basis points of rate hikes in order to stem the fall in currency.

Joachim Klement, head of investment research at Fidante Capital, also in a reaction comment, said Turkey is in danger of a full-blown financial crisis and a default.

"If Turkey is not able to stabilize and reverse the course of the lira, it might sooner or later have to impose capital restrictions to prevent further outflows and go to the (International Monetary Fund) for a bailout," he said. "Alternatively, Turkey may default on its debt. Asking the IMF for help would certainly be the better option for Turkey, but (President Recep Tayyip) Erdogan's pride, together with his recent attacks on international investors, make it harder for him to ask the IMF for help, should the situation get worse."

And Damien Buchet, head of Finisterre Capital's total return strategy, said in a comment that it looks as though the reaction of Turkish policymakers "will remain inadequate in the short term, with monetary policy staying behind the curve — tightening policy later and by less than expected — and fiscal policy staying relatively loose. To be sure, although the starting point in terms of external indebtedness level was not extreme, the fast decay of the past few days in terms of currency weakness and the lack of adequate response from authorities, have made the debt dynamics much trickier," he said.