Turkey Lira Falls to Record on Ratings Cut, State of Emergency

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  • S&P cut rating to BB, two steps below investment grade
  • President Erdogan declared three-month state of emergency

Turkey Volatility: More Downside for Markets?

Turkey’s lira fell to an all-time low after S&P Global Ratings downgraded the country’s debt on concern about an increase in political risk after a failed coup last week and the government declared a state of emergency as it pursues those responsible.

The currency slumped to as low as 3.0973 against the dollar before falling 1.5 percent to 3.0898 on Wednesday. Stocks earlier capped the steepest three-day selloff in three years and bonds tumbled, sending the yield on 10-year notes to the highest since May.

President Recep Tayyip Erdogan declared a three-month state of emergency in a televised address after a day of meetings with top generals on the National Security Council, and then ministers in cabinet. Since the collapse of the attempted putsch on Saturday, authorities have arrested thousands of army officers, judges and prosecutors, and embarked on a purge of other institutions such as universities.

S&P cut Turkey to BB, two steps below investment grade, from BB+ with a negative outlook, saying the move reflected the further fragmentation of the political landscape after last week’s attempted coup. This will undermine the country’s investment environment, growth and capital inflows into its externally leveraged economy, it said. S&P’s downgrade comes two days after Moody’s Investors Service put the sovereign on review for a possible downgrade.

“A three-month state of emergency is very far from market-friendly policy, and we will see further pressure on the currency,” Neil Shearing, chief emerging markets economist at Capital Economics in New York, said by phone. They currency may fall to as low as 3.20 per dollar by year-end, he said.

The failed overthrow attempt has led President Recep Tayyip Erdogan to crack down on his opponents. About 60,000 people have been detained, suspended, fired or stripped of their professional accreditation since the coup, according to Bloomberg estimates. An announcement will be made after meetings with National Security Council, ruling AK Party government ministers and cabinet.

“Turkey can’t take its investment grade rating for granted and with it now universally understood that Turkey’s lacks political equilibrium,” said Michael Harris, the head of research at Renaissance Capital Ltd. in London. “It probably makes it tougher for rating agencies to just focus on fundamentals.”