Turkey’s lira plummets, credit swaps increase after the election

LONDON, May 14 (Reuters) – Turkey’s lira held near a two-month low in early trade and the cost of insuring exposure to the country’s debt rose, as the country’s presidential race appeared headed for a runoff.

The lira was trading at 1[ads1]9.64 against the dollar at 0608 GMT, after falling to a two-month low of 19.70 in opening hours, not far from its lowest level this year after deadly earthquakes in February.

It was on course for its worst trading session since early November.

The parties of both incumbent Tayyip Erdogan and opposition rival Kemal Kilicdaroglu claimed the lead after Sunday’s presidential and parliamentary elections, but sources in both camps admitted they may not clear the 50% threshold to win outright.

“This is a big disappointment for investors hoping for a victory for opposition candidate Kilicdaroglu and the return to orthodox economic policies he promised,” said Hasnain Malik, head of equity research at Tellimer.

The five-year Turkish credit default swap spread TRGV5YUSAC=MG jumped 105 basis points (bps) from Friday’s levels to 597 bps, according to S&P Global Market Intelligence, the highest since November 2022.

The presidential vote will determine not only who leads Turkey and shapes the foreign policy of the NATO member nation of 85 million people, but also how it is governed and how it tackles a deep cost-of-living crisis.

Analysts expect the lira to fall in the wake of the election after years of economic imbalances and unorthodox monetary policy.

JPMorgan ( JPM.N ) predicted the lira could soften to levels of 24-25 to the dollar. Goldman Sachs said in a note in recent days that its calculations showed the market priced the lira to weaken by 50% over the next twelve months, including a sharp devaluation after the election.

The lira, which is subject to sharp fluctuations before ordinary trading hours, has weakened 5% since the start of the year.

The currency has lost nearly 95% of its value over the past decade and a half as sugar-rush economic policies have led to spectacular boom and bust cycles and violent bouts of inflation and currency market turmoil.

A potential second round of voting is scheduled for May 28.

Reporting by Karin Strohecker; Editing by Frank Jack Daniel

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