"Turkey risk: Alert - Sell-off may bring unorthodox policy response
SUMMARY
Monetary tightening by the three major central banks is fuelling rising risk aversion in global financial markets, causing sell-offs in emerging markets in May and June. While most countries look well-positioned to deal with higher borrowing, Turkey has moved a few steps closer to a fully fledged financial crisis. The Turkish central bank has raised the overnight interest rate by 400 basis points (bps) in recent weeks to thwart a collapse in the value of the lira, and lending rates have increased by 600bps. This has momentarily arrested the fall of the currency, but markets are not in a forgiving mood. With inflation set to take off, investors will put further pressure on the lira, betting on future rate hikes. In an environment where Turkey is the biggest and most vulnerable target in the emerging world, could the government be tempted to follow the examples of Malaysia from the 1990s and Argentina from earlier in the decade and implement unorthodox measures to avert a financial crisis? Businesses may bet against the lira, but they might think twice about betting against capital controls."
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