The currency of Turkey fell again on Monday, as the country struggled with the crisis, which crashed markets around the world.
The Turkish lira fell 11% against the dollar, reaching a record low before recovering some of its losses in volatile trading. Lira has already fallen by more than 20% last week, as political clash with the United States and investors are concerned about the lack of action by the Turkish government to address the problems associated with its economy.
The lira peg has unresolved world markets, while shares of European banks subject to special pressure due to concerns about the exposure of Turkish creditors. Drummers also fell into the currency of other major emerging markets, such as South Africa and India.
On Monday, The reserves fell by 2% in Tokyo and more than 1% in Hong Kong, Largest European markets fell by about 0.5%, and shares of banks, including Spanish BBVA and Italian Unicredit ( sliding 3%. )
Turkish President Recep Tayyip Erdogan rejected urges the country to raise interest rates try to ease the crisis – and pounced on the United States after it announced new trade tariffs for Turkey.
"Are you a strategic partner in NATO, and on the other hand, you hit your ally in the back? Is that acceptable? "He said in his speech on Monday.
Concerns about the debt crisis
Economists warn that if confidence is not restored quickly, Turkey may exit the crisis and the debt crisis that requires rescue from the International Monetary Fund.
"Investors are clearly concerned that the Turkish government will not act (or allow the central bank to act) to strengthen the currency, and fear that this could lead to a crisis in the Turkish banking sector," said William Jackson, chief emerging markets economist research firm Capital Economics, wrote in a note to customers on Friday.
Lira now falls more than 40% against the dollar since the beginning of the year, which makes Turkish companies much harder to repay loans that they exported in US currency.
Meanwhile, the US government is using the lira crisis for increase pressure on Turkey over his detention of an American pastor.
"I just authorized the doubling of tariffs for steel and aluminum against Turkey, as their currency, the Turkish lira, falls quickly down against our very strong dollar!" President Donald Trump wrote a Twitter on Friday. "Our relations with Turkey are not good yet!"
Investors are waiting for "a convincing answer"
The government of Turkey has struggled to calm investors.
Finance Minister Berat Albayrak said in a series of tweets at the end of Sunday that the government has embarked on the implementation of an economic action plan of "necessary measures" to address this problem. Albayrak, who was Erdogan's son-in-law, did not provide many details.
Then the central bank announced statement at the beginning of Monday that he "will take all necessary measures to maintain financial stability" and "will provide all the liquidity needed by banks." it's the same said this will reduce the amount of funds that banks should keep in reserve.
The Turkish currency erased some of its early losses, but the announcements were not enough to launch the rally. Lira fell by about 7% against the dollar in the second half of the day in Europe.
Investors are waiting for "a convincing response from the central bank and the government," said Rob Carnell, an economist at ING, in a note to clients on Monday.
One dollar now buys a little less than seven lira, compared to less than four at the beginning of the year.
Murat Askanat, a toy seller in Istanbul, told CNN that price increases make work difficult.
"We do not know what will happen next, this is a problem," Askanat said. "The products I used to buy 10 lira are now 20. How can I reflect this to my customers?"
Turkish leaders insisted that the lira accident is the result of a speculative attack, rather than any real problems in the country's economy.
Turkish authorities said on Monday that they are investigating 346 accounts in social networks, which they accuse of provoking wild currency movements, according to the state news agency.
"The law will apply to those who publish fake news about banks, financial institutions and companies open to the public," the Turkish Capital Markets Council said in a statement.
But investors are more concerned about the lack of strong action from the central bank, which stunned the markets at the end of last month, leaving interest rates unchanged. Many observers interpreted the unorthodox decision as a sign that Erdogan, who supports lower interest rates, has increased his influence on the bank.
"We have not and will not compromise the rules of a free market economy," Erdogan said. "No one should listen to speculation."
The situation in emerging markets
Investors have flocked to the United States in recent months, due to higher bond yields and a stronger dollar, as the Federal Reserve gradually increasing interest rates,
This trend caused a shock in emerging markets: Argentina was forced in June to ask the International Monetary Fund for a rescue of 50 billion dollars. USA.
The plight of Turkey caused fears over a larger number of victims. South African rand fell to 8% against the dollar at the beginning of Monday, before recovering to more than 2%. The Indian rupee lost about 1% against the dollar, reaching a record low.
But some market analysts advise investors to abandon emerging markets as a whole as a result of turbulence in Turkey.
"Lily drop drivers are very specific to Turkey," said Kerry Craig, global strategist at JPMorgan Asset Management, in a note to customers. "Therefore, it should not disrupt positive fundamentals in other emerging markets in the long term."
– Hande Atay Alam, Isil Sariyuce and Gul Tuyusz contributed to this report.
CNNMoney (Hong Kong) First published August 12, 2018: 11:58 pm ET