Turkish Bonds, Stocks Slump as Erdogan Fails to Calm Investors
Turkish bond yields surged and stocks slumped after Prime Minister Recep Tayyip Erdogan failed to calm investor concern as anti-government protesters demonstrated for the seventh day. The lira depreciated.
“The dominance of a minority over the majority cannot be allowed,” Erdogan said in Tunis, Tunisia, the last stop in his tour of three north African countries. A project to develop Istanbul’s Taksim Square, the center of the protests, will “respect the environment,” he said during a joint news conference with his Tunisian counterpart Ali Larayedh, accusing protesters of damaging state property.
Yields on two-year benchmark bonds advanced 46 basis points to 6.78 percent at 5:48 p.m. in Istanbul, extending the weekly jump to 71 basis points. The Borsa Istanbul National 100 (XU100) index retreated 4.7 percent to 75,895.26 at the close, its lowest level since Dec. 6. The lira weakened 0.3 percent to 1.8986 a dollar, after earlier strengthening as much as 0.6 percent.
“While I was just hoping that Erdogan may soften his tone, clearly it’s too early for that,” Piotr Matys, an emerging-markets analyst at 4Cast Ltd. in London, said in e-mailed comments. The statement is fueling “further selloff in Turkish bonds,” he said.
As protests and clashes with the police continued in cities including Istanbul and Ankara, a group that took to the streets in Erdogan’s hometown of Rize was attacked yesterday. The incident came after Erdogan said before departing for his North Africa tour on June 3 that he was “restraining” his supporters from retaliating against protests. At today’s press conference, he said his supporters “never took to streets.”
The cost of insuring Turkish debt against default using five-year credit-default swaps rose 19 basis points to 172 today, up from 131 at the end of last week, according to data compiled by Bloomberg. The measure was at 283 basis points a year ago.
“The market is in the crossfire,” Bulent Topbas, a fund manager at Strateji Menkul Degerler AS, said in a phone interview before Erdogan spoke. “Investors were already exiting emerging markets on speculation that the U.S. Federal Reserve will reduce asset purchases. The protests have added insult to injury.” Topbas estimated capital outflows of “at least $1 billion” in the past week due to the unrest.
The anti-government movement spread across Turkey after police attacked demonstrators opposing plans to develop a park in Taksim on May 31. The protesters have called for the resignation of Erdogan, saying he’s become too autocratic. On June 3, the first business day after the protests, Turkish stocks plummeted more than 10 percent, the most in more than a decade, while two-year bond yields surged 71 basis points, the most in percentage terms since Bloomberg began compiling the data in 2005.
The central bank on May 16 lowered its benchmark one-week repo rate by 0.5 percentage point to a record low of 4.5 percent, while also cutting the top and bottom ends of its so-called interest-rate corridor by the same amount.
“The central bank’s assumptions when it cut interest rates have been overridden by the developments,” Topbas said. “It was like wearing a bikini while the weather was becoming colder.”
Governor Erdem Basci will deliver a speech on monetary policy in the northern Turkish city of Giresun on June 12, the central bank said in an e-mailed statement today. The bank’s rate-setting committee next meets on June 18 in Ankara.
“Institutional investors who know Turkey well could have perceived a buying opportunity after the past week’s decline, but they didn’t,” Strateji’s Topbas said. “A question has been developing on whether there’s political risk in Turkey.”
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