Turkish lira hits record low as bonds steady after post-election rout

LONDON: Turkiye’s lira weakened to a record low against the dollar on Thursday, after incumbent Tayyip Erdogan’s lead in presidential elections surprised markets, while the nation’s sovereign dollar bonds steadied after a three-day post-election rout.

The cost of insuring the country’s debt against default fell slightly, but equity markets and banking stocks endured fresh losses in afternoon trading.

Erdogan’s stronger-than-expected showing in Sunday’s vote has rattled markets that were betting on an end to his more than two-decade rule and the unorthodox economic policies that have come to characterize it.

Erdogan will face challenger Kemal Kilicdaroglu in a May 28 runoff vote.

The lira weakened to a record low of 19.8050 to the dollar by 1904 GMT, bringing its losses since the election to more than 1%. The currency lost 44% in 2021 and 30% in 2022 due to a series of interest rate cuts despite high inflation that were part of Erdogan’s unorthodox economic strategy.

The 2045 bond gained close to one cent to trade at just over 70 cents on the dollar by 1300 GMT, Tradeweb data showed.

Three straight days of losses saw many of the longer-dated issues more than 10 cents below the Friday close and some are trading below the 70 cent mark that analysts broadly consider the threshold for distressed territory.

Credit default swaps, which measure the cost of insuring the country’s debt against default, narrowed by 8 basis points (bps) by mid afternoon, to 684 bps, data from S&P Global Market Intelligence showed. Earlier in the day they had reached 696, compared with around 480 bps before the election.

Turkey’s main banking stocks index lost a further 3.64% on Thursday, and was down by 20.7% from its pre-election close, while its overall equities index closed 3.43% lower on the day.

Separately, central bank data showed foreign investors cut their exposure to local stocks and bonds in the run up to the election: their bond holdings fell by $31.3 million in the week to May 12, and their stock holdings declined by $135.1 million.

Central bank data also showed that net international reserves dropped to a more than 21-year low of $2.33 billion in the week to May 12 as demand for foreign currency surged ahead of the elections.

Turkish banks have restricted access to some individual loans and postponed decisions on extending corporate loans following new regulations introduced since Sunday’s inconclusive presidential vote and ahead of the runoff, bankers said.