Turkey’s financial authorities scrambled Monday to stop a rout in the currency and stock market, after the country lurched toward a full-blown political crisis at the weekend with the imprisonment of a rival to President Reçep Tayyip Erdoğan.
The lira fell nearly 2 percent against the dollar and the government bond market was also hit by heavy selling as markets reopened after the weekend, but by midday there were signs that emergency measures from the Central Bank of Turkey (TCMB) and stock exchange regulator (SPK) had contained the fallout, at least in the short term.
Turkey’s currency had slumped to a new all-time low against the dollar and euro last week after Istanbul Mayor Ekrem İmamoğlu — the man who was set to challenge Erdoğan for the presidency at the next election in 2028 — was arrested on charges of corruption. That in turn triggered a wave of nationwide protests, which continued on Sunday after a court ordered İmamoğlu’s detention in jail pending trial.
Both the protests and the market fallout could have been worse, Deutsche Bank strategist Jim Reid said in a note to clients on Monday.
“The fact that he wasn’t charged with terrorism means the news isn’t as extreme as it could have been,” he argued, noting that “such a move would have led to the appointment of a trustee to the Istanbul Municipality, risking more protests and unrest.”
Turkey’s interior minister said on Monday around 1,100 protesters have been detained in total so far.
Déjà vu all over again
The events have revived fears — never far from the minds of investors in Turkish assets — that the country will slide into outright autocracy and that the government will again ride roughshod over them in Erdoğan’s efforts to entrench himself in power.
Foreign investors and many domestic businesses are still licking their wounds after Erdoğan secured reelection with a wild spending spree that led to inflation peaking at over 80 percent in 2024. Erdoğan’s crackdown on political opposition after a failed coup in 2016 had likewise led to a sharp lira devaluation and big losses in local markets at the time.
However, in contrast to both of those episodes, analysts say the Turkish economy is currently on a relatively solid footing: Inflation has been falling steadily and confidence in the domestic banking system has been rising. The current account deficit, typically the Achilles’ heel of the Turkish economy, has run at less than 4 percent of gross domestic product in the last three months, according to JPMorgan analysts.
“The macro-economic set-up does not require any large lira adjustment, even if variables have started to deteriorate,” they argued in a note to clients on Monday.
Against that backdrop, the authorities’ efforts to keep stability have gained traction relatively quickly. Already last week, the TCMB had reacted with a suite of measures to deter selling the lira: It had raised its overnight lending rate to 46 percent from 44 percent and had suspended the regular one-week lending operations through which it controls the domestic money supply. On Monday, it tightened lira liquidity further by selling 50 billion lira ($1.31 billion) in 91-day bills — the first time since 2007 that it has resorted to that measure.
The SPK, for its part, had tried to put a floor under the stock market on Sunday by instituting a ban on short selling, and also made it easier for companies to buy back their stock on the market. The benchmark BIST 100 stock index, which fell some 15 percent last week as İmamoğlu was first arrested, then charged, responded by rising just less than 1 percent on Monday.
However, analysts warn that the situation is still evolving and that the economy is unlikely to escape the consequences: BNP analysts said the TCMB will likely have to keep policy tighter than expected for the rest of the year, limiting the degree of support it can give the economy. A weaker lira, they argued, will continue to push the price of imports higher, leaving inflation still around 30 percent at the end of this year.