(Bloomberg) — The cost of borrowing Turkish liras in the offshore market rose to the highest in two years after Turkish authorities detained President Recep Tayyip Erdogan’s main political rival on corruption charges on Wednesday.
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The rates, known as the next-day offshore forward implied yields, stood at 175% at 8:45 a.m. in Istanbul on Thursday, up from just under 38% before the latest political turmoil unfolded.
Istanbul Mayor Ekrem Imamoglu, the most popular Turkish politician who could one day challenge the president’s rule, was taken into custody, sparking protests from members of opposition parties. The mayor’s detention — on charges he denies — highlights an increasingly aggressive campaign that Erdogan is waging against critics to silence dissent.
The probe against his most formidable challenger serves as a stark reminder of the risks involved in investing in Turkey, where assets posted the biggest declines worldwide on the day of the detention. Authorities said as much as $9 billion was spent to support the lira. The currency showed some signs of stabilizing as investors bet the risk of a reversal in economic policies — including tight monetary policy — remains limited.
The currency was down 0.3% and trading at 37.9952 per dollar as of 8:39 a.m., following a 3.2% drop on Wednesday. Future contracts on the Borsa Istanbul 30 Index dropped 0.4% at the open, signaling that selling pressure in Turkish equities may also be easing. The main Turkish equity index fell 8.7% the previous day.
Further selling pressure from foreign investors is “likely to be limited,” Goldman Sachs (GS) economist Clemens Grafe wrote in a report. “Foreign positioning in Turkey has risen but remains rather limited to positions at the front end of the curves in our view.”
“The assessment of the political risk to markets likely will remain more elevated and hence it is also unlikely that these long positions will be rebuilt in a hurry,” Grafe said.
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