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Turkey’s Lira Weakens to Record as Erdogan Fights Graft Probe

Turkey's Lira Currency
The lira dropped as much as 1.1 percent to 2.0947 per dollar, the weakest since at least 1981, at 10:37 a.m. in Istanbul. Photographer: Kerem Uzel/Bloomberg

Turkey’s lira tumbled to a record against the dollar and euro while bonds fell as Prime Minister Recep Tayyip Erdogan’s government purged police leadership in a fight back against a probe into official corruption.

The lira dropped as much as 1.2 percent to 2.0982 per dollar, the weakest since at least 1981, before trading 0.9 percent lower at 5:55 p.m. in Istanbul. The currency also fell as much as 1.2 percent to a record low of 2.8681 per euro. Yields on two-year benchmark notes increased 25 basis points to 9.61 percent, the highest since Sept. 3.

“Political risk has increased considerably,” Melih Onder, chairman of Logos Portfoy Yonetimi AS, which manages about 180 million liras ($86 million), said by phone from Istanbul. “It took a few days for foreign investors to digest what has happened. This selloff could continue for as long as 10 days.”

The government dismissed 14 department chiefs at the national police today, NTV television reported, in addition to some 50 yesterday, according to a Bloomberg HT report. The dismissals came after police detained dozens, including the head of a state bank and the sons of three cabinet ministers, in an inquiry into graft. Prosecutors requested arrests of 14 suspects, CNN Turk television reported today.

The central bank in Ankara published a statement saying it could increase the amount of dollars it sells for liras to “as much as 10 times” the announced minimum amount on days of excessive lira volatility. It sold $400 million in today’s auction at an average price of 2.0866 per dollar.

‘Financial Junta’

Bulent Gedikli, a board member of Erdogan’s ruling Justice and Development Party, said Turkey was under attack by a “financial junta” seeking to undermine confidence.

“There are some who invent concepts like ‘Fragile Five,’ that include Turkey,” Gedikli said in an interview with the state-run Anatolia news agency today, referring to a Morgan Stanley grouping of Turkey, India, Indonesia, South Africa and Brazil of the big economies it says are most vulnerable to portfolio outflows. “Those who say these things clearly constitute an economic junta.”

A state bank was “targeted” in the graft investigation because it was “the bank which contributed most to Turkey’s opening,” Gedikli said.

Suleyman Aslan, chief executive officer of state-run Turkiye Halk Bankasi AS, is among those taken into police custody and was being escorted by police to a courthouse today, according to Anatolia. The shares of Halkbank, as the lender is known, rose 4.8 percent, paring this week’s decline to 15 percent.

Escalating Confrontation

The probe has sparked concerns of an escalating confrontation between Erdogan and U.S.-based Islamic cleric Fethullah Gulen. Some politicians from Erdogan’s party signaled that Gulen was behind the operation, which he has denied.

The Turkish currency has dropped 15 percent against the dollar this year, the fourth-worst performance among 24 major emerging market peers tracked by Bloomberg, and 18 percent versus the euro. Two-year benchmark yields climbed 457 basis points since May 22, when U.S. Federal Reserve Chairman Ben S. Bernanke first discussed curbing asset purchases.

The lira may depreciate to as low as 2.1037 per dollar by the end of the year, according to Tugberk Citilci, deputy manager at Sanko Securities in Istanbul.

“The central bank’s real concern is the pass-through effect to inflation,” Citilci said in an e-mail today. “The currency’s weakening comes in addition to the central bank missing its target of 5 percent inflation this year. It will be a tough start to the new year for the bank.”

‘Aggressive Action’

The lira’s decline has increased the possibility of “an aggressive reaction” from the central bank, Citigroup economists Ilker Domac and Gultekin Isiklar said in an e-mailed report today. In case “unfavorable developments” continue, the bank may have no choice but to raise rates, the economists said.

The central bank maintained its one-week repurchase rate at 4.5 percent on Dec. 17. It also held the overnight lending and borrowing rates unchanged at 7.75 percent and 3.5 percent, respectively.

The Borsa Istanbul 100 index advanced 0.7 percent to 69,572.83, paring its weekly drop to 6.1 percent, the worst since the five days ended Aug. 23. The index has retreated 11 percent this year.

“We’re used to such political developments,” Bulent Topbas, a strategist at Strateji Menkul Degerler AS in Istanbul, said in e-mailed comments today. “In the end, Turkey is established atop of the Byzantine civilization -- political squabbling and intrigue never ends.”

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