Turkey's market rout worsens amid protests, worst stock slump since 2008

By Canan Sevgili and Ezgi Erkoyun

ISTANBUL (Reuters) -Turkish stocks were set for their worst week since the aftermath of 2008's Lehman Brothers collapse on Friday as concerns about this week's detention of President Tayyip Erdogan's main political rival refused to subside.

The lira was set for a 4% weekly slump despite aggressive action from Turkey's central bank in recent days while the latest selloff in stocks triggered two market-wide circuit breakers on Borsa Istanbul

The move against Istanbul mayor Ekrem Imamoglu was called a coup attempt by the opposition and appears to cap a months-long legal crackdown on opposition figures which has been condemned as a politicised attempt to silence dissent.

Turkey's lira, stocks and bonds have suffered since Wednesday when authorities detained Imamoglu, seen as Erdogan's main political rival. Protests erupted and thousands marched nationwide.

By 1450 GMT the benchmark BIST-100 index was trading 7.82% lower, and the banking index had fallen 9.37%, after trading resumed at 0857 GMT.

The benchmark BIST-100 index is on track for a 15% weekly plunge - its worst drop since the global financial crisis in October 2008.

Turkey's sovereign dollar bonds also slid for the third straight day, with the longer-dated issues shedding 2 cents and on track for a weekly loss of more than 3 cents, their largest since January 2024.

The cost of insuring Turkey's debt against default also widened by 18 basis points to 322 bps, data from S&P Global Market Intelligence showed, the widest levels since March 2024.

While the Turkish lira traded at 38.0050 against the U.S. dollar, flat from the previous close and above Wednesday's record low of 42, the currency is down 6.7% so far this year.

The central bank sold some $10 billion in FX after Wednesday's record low, according to economists' calculations, and took liquidity measures to limit volatility and ease FX demand.

The central bank also suspended its one-week repo auction and hiked its overnight lending rate to 46%, which economists said amounted to a 350-400 basis-point tightening in policy.

The moves are expected to increase funding costs, which could weigh banks' balance sheets, pushing loan interest rates higher while lowering credit volumes.

Turkey's Finance Minister Mehmet Simsek on Friday called market fluctuations "temporary" and said necessary measures were being taken.

Simsek, who met Turkey's Banking Association (TBB) board members at a fast-breaking dinner, said Turkey's economic programme continued to be implemented with determination and the government had the necessary instruments, according to a readout from the TBB.

The central bank promised to tighten policy "in case a significant and persistent deterioration in inflation is foreseen". Overnight interest rates on Thursday climbed 134 basis points to 43.64%, according to data.

EASING CYCLE PAUSE?

The developments have dashed hopes of a central bank policy rate cut at the next meeting, scheduled for April 17.

With inflation falling, the central bank had cut its policy rate by 750 basis points since December, to 42.5%, after an 18-month tightening cycle reversed years of unorthodox policy. Before Wednesday, investors had expected the easing cycle to continue through the year.

"This has put an end to expectations of a rate cut in April and triggered a sell-off in banking stocks," said Serhat Baskurt, Head of Algorithmic Trading at ALB Yatırım, adding that the central bank's moves this week indicated higher-than-expected foreign exchange demand.

JPMorgan, after Thursday's overnight rate hike, said it expected the bank to keep its policy rate unchanged at 42.5% in April, and only resume its cutting cycle from June 19.

It said that while it did not expect a major policy shift, there was still uncertainty over whether the developments could generate "a larger sentiment shock."

"These monetary measures are unorthodox; however, it is encouraging to see the CBRT addressing the risk of dollarization among Turkish residents," it said in a note to clients.

(Reporting by Canan Sevgili and Ezgi Erkoyun, Additional reporting by Libby George, Karin Strohecker, Marc Jones and Ebru Tuncay; editing by Mark Heinrich and Angus MacSwan)