Late on Friday afternoon, just as the market was closing and news of the Turkish coup spread, Turkish ETFs tumbled and the Lira dropped the most in 8 years, plunging the most in years, on investor concerns about the future of the country, and a spike in news that local depositors were - understandably - pulling their money from banks, potentially sparking a bank run. The Turkish Lira losses added to its woes after having slid 20% last year; the currency has now lost more than 40% of its value since the end of 2012.
And while the (allegedly staged) coup has been put down, questions remained about the stability of the Turkish financial system. Which is why early today, Turkey’s central bank held an extraordinary meeting with bank executives to discuss ways to minimize the market impact of the coup attempt. The bank convened members of the Banks Association of Turkey, and shortly after announced a series of steps which, comparable to the post-Brexit reaction, sought to stabilize risk assets.
In a terse, 7-bullet statement released today, Turkey’s central bank - already scheduled to announce its rate decision this Tuesday - vowed to provide "unlimited liquidity" to banks, while Deputy Prime Minister Simsek said nation’s macroeconomic foundations remain “solid.” This is what the TCMB announced:
The following measures have been taken for the efficient functioning of markets:
The Central Bank will provide banks with needed liquidity without limits.
Commission rate for the Intraday Liquidity Facility will be zero.
Banks will be allowed to place foreign exchange deposit as collateral without limits for needed Turkish lira liquidity.
Banks’ current foreign exchange deposit limits of around 50 billion US dollars may be increased and utilization conditions (collateral and cost) may be improved if deemed necessary.
All markets and systems (the Electronic Fund Transfer and the Electronic Security Transfer and Settlement systems) will be left open until final settlement of transactions.
Market depth and prices will be closely monitored.
All measures will be taken to ensure financial stability, if deemed necessary.
Will it be sufficient to stabilize the financial situation in Turkey? Here is a roundup of Wall Street's opinions on the aftermath of Turkey's failed coup from several sellside analysts:
Risk-correlated G-10 currencies could suffer, while spurring demand for haven and liquid assets such as JPY, CHF and USD, Valentin Marinov, London-based head of G-10 FX research, said on Friday
“It is realistic to expect heightened uncertainty at least at the start of the new week”
“Longer term, another key question remains how the developments will affect the deal with EU about the migrants that was signed not so long ago and has so far helped ease the refugee crisis to a degree”
Recent strong pickup in foreign inflows into Turkey “will now surely reverse, causing inevitable market distress,” Michael Howell, managing director of CrossBorder Capital, said in an e-mail on Saturday
Turkey’s 3Q “trading story is over,” Renaissance Capital analysts including Michael Harris, Daniel Salter and Charles Robertson say in an e-mailed report
“Turkey was only a trade for now; for it to become more Erdogan needs not just to stabilize politics, but to allow for a glimmer of hope in the country’s outlook to rekindle the economy’s animal spirits”
“We see better and more fundamental ways to play the EM risk-on trade: Russia, with its definitive case for rate cuts on disinflation; South African carry; and more hopeful markets such as Brazil”
Turkey coup attempt may weigh on private funding flows, but market spillover may be limited
“The main danger from a financial standpoint is the dependence of Turkey’s banks and corporates on foreign- exchange financing,” Enrique Diaz-Alvarez, risk officer at Ebury Partners, one of the most accurate TRY forecasters, said in an interview Friday
“If the result is clear-cut one way or the other, we think the spillover from the coup to all the other markets will be limited. Though that’s definitely not the case for Turkey stocks and Turkey assets”
Given the receding risk of a civil war in Turkey, TRY will recover toward ~2.90/USD once the situation stabilizes over the weekend and markets reopen on Monday, Per Hammarlund, chief EM strategist at SEB, says in e-mailed comments Saturday
If the government resumes full control of the country’s institutions as SEB expects, initial market reaction will likely be small
While USD/TRY pair should return to 2.90 area, the aftermath of the event will likely be marked by a prolonged period of uncertainty
Longer-term effects of coup seen negative as the government will likely become more authoritarian, hurting the business environment and investor sentiment; yields will take longer to return to pre-coup levels
“Even if this coup fails, it is a disaster for Turkey where the risk premium on the political side must move up sharply,” Emad Mostaque, a London-based strategist, writes in note
“This could also act as a catalyst for the next leg down in emerging markets as it sullies the entire asset class. We maintain that political risk is being underpriced by markets”
“It will be a political turmoil, investors should be ready to see the lira and lira assets tank,” Ipek Ozkardeskaya, senior market analyst at London Capital Group, said in an interview Friday from Izmir in Turkey
USD/JPY returning below 105 tells you sentiment was hit, according to head of FX strategy Vasileios Gkionakis
Implications for TRY will be severe if developments escalate
“Initial market reaction is likely to be negative, but not as much as it would have been if the army gained full control,” says Piotr Matys, EM analyst at Rabobank
As uncertainty will prevail in the short term, foreign investors will reduce their exposure to Turkish assets, which have been performing well over the past few weeks