Turkish Markets Tumble as Kurdish Leaders Detained in Raids

(Bloomberg) -- Turkey's lira plunged to a record and bonds fell with stocks after police rounded up pro-Kurdish opposition leaders, prompting investor concerns that an increasingly autocratic government is dismantling democracy in the country.

The currency dropped as much as 1.3 percent to 3.1504 per dollar and the yield on 10-year government bonds climbed to a more than five-month high. Turkish equities also fell the most in the world as police began detaining Kurdish lawmakers including co-chairs of the Peoples' Democratic Party, known as the HDP, in post-midnight raids on Friday. An explosion in the largest city in Turkey's southeast also rattled investors.

Extension of a crackdown on the opposition following a failed July 15 coup attempt and a slowdown in the economy has hurt sentiment, making the lira the worst performing emerging-market currency over the last three months. President Recep Tayyip Erdogan has been consolidating power using emergency rule, with more than 100,000 people fired, suspended or detained in the months following the botched putsch.

Democracy U-Turn

“It will get worse and worse as democracy is faltering in that country,” said Cristian Maggio, head of emerging-market research at TD Securities in London, who sees the lira depreciating to 3.40 per dollar by the end of next year. “Investors invest in authoritarian regimes that were already so, not the ones that U-turn on democracy and are so close to the west as Turkey.” The country is likely to become increasingly isolated from European partners and possibly the Western military alliance as well going forward, he said.

The currency's plunge prompted the central bank last month to pause an easing cycle which had seen the monetary authority lower the overnight lending rate by 250 basis points since March, even as investors prepare for tighter policy in developed economies. The lira traded 1 percent lower to 3.1416 per dollar as of 12:30 p.m. in Istanbul.

Investors ‘Spooked'

The Borsa Istanbul 100 Index dropped for a fourth day, declining 2.5 percent, extending the biggest loss among the world's major indexes tracked by Bloomberg. The decline was led by the country's largest listed lenders, Turkiye Garanti Bankasi AS and Akbank TAS. The yield on the 10-year lira-denominated government bond jumped 19 basis points to 10.37 percent, the highest since May 23 on a closing basis.

Over 100 people were wounded and eight killed after a bomb-laden vehicle exploded in Diyarbakir on Friday morning, Prime Minster Binali Yildirm said. More than 750 security force members and hundreds of civilians died between July 2015 and Sept. 2016, in military operations against the separatist Kurdistan Workers' Party, or PKK, according to International Crisis Group, which monitors conflicts. The PKK is considered a terrorist organization by Turkey and allies including the EU and U.S.

“Last night's developments are likely to intensify the tension in the southeast region,” Gokce Celik, chief economist at QNB Finansbank, wrote in an e-mailed note before markets opened, saying the nation's lira-denominated assets will probably remain under pressure.

Selahattin Demirtas, one of the HDP co-chairs detained on Friday, had said that members of his party wouldn't abide by requests to appear before courts, saying the judiciary had become a servant of the ruling party and its orders were illegitimate. Erdogan says the HDP is merely a front for the PKK.

“When checks and balances deteriorate and the economy also suffers, then all comes together and investors are spooked,” Maggio said. “Many local players may feel insecure and look to take their money abroad to safeguard it. So this naturally adds one-way pressure on the currency.”

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net. To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Chris Vellacott, Daliah Merzaban