ISTANBUL: Turkey's lira rose 3 percent against the dollar on Monday, regaining much of the ground it lost after Friday's failed coup as investors took heart from government moves to regain control, though concerns simmered about the extent of the crackdown.
Turkey's main BIST 100 share index, which had its first chance to react to the turmoil, fell 4.8 percent in early trade, pulled lower by banking shares and echoing the initial tumble in the lira on international markets.
Turkey's government suspended thousands of police officers on Monday, widening a purge of the armed forces and judiciary after the coup, and raising concern among European allies that it was abandoning the rule of law.
Traders said Monday's fall in the stock market underlined long-standing concerns over President Tayyip Erdogans' plans to concentrate more power in the top job. They are also worried that his populism might derail structural reforms.
"It is no secret that a significant portion of the investor base is very sensitive to concentration of more power in Erdogan's hands, and they will be turned off by strengthening of Erdogan's position following the coup attempt," Finansbank Chief Economist Inan Demir said.
The lira was up 3 percent at 2.9660 against the dollar, paring the losses suffered in overseas trade on Friday, when news of the coup attempt sent it tumbling 5 percent.
Other traders said the market reaction had been relatively measured, given the scale of the political upheaval.
"Market reaction (is) largely as expected, muted, given that the coup was put down and order restored by Erdogan and his supporters," said Tim Ash, a strategist at Nomura International.
"Erdogan's authority and dominance over domestic politics ... will further the move to an executive presidency which raises more issues over long-term growth and development."
A proponent of consumption-led growth, Erdogan has repeatedly called for lower interest rates, even as inflation remains above the central bank's target.
BANK, LIRA SUPPORT
To reassure the market, the central bank said on Sunday it would provide unlimited liquidity to banks and would support the lira by removing limits on foreign currency deposits that commercial lenders use as collateral.
Deputy Prime Minister Mehmet Simsek also tried to assure markets on Monday, saying the coup attempt will not have a permanent impact on the economy and reforms will continue at a faster pace.
The central bank is scheduled to announce its monthly interest rate decision Tuesday and expectation of economists as of Friday was for a further 50 basis points cut in the overnight lending rate. The central bank has lowered the overnight lending interest rate by 175 basis points this year.
However, market participants are now more cautious about a new rate cut.
"The central bank already pledged to safeguard financial stability via unlimited access to lira liquidity. Given that Monetary Policy Committee is on a crisis management mode, a consistent prudent approach calls for steady rates on Tuesday," Deutsche Bank said in a report on Monday.
"We move Turkey sovereign credit to underweight - we expect risk premium to rise and spreads to widen, with the failed coup attempt underlining the elevated level of political risk in the country to investors already nervous about Turkish politics," the bank said.
Turkey's most-traded dollar bond fell more than three cents at one point, Tradeweb data showed and yields rose more than 10 basis points. The 2024 issue fell half a cent for a 15 bps rise in yields. Markit data showed five-year credit default swaps rose 16 bps from Friday's close to 241 bps, the highest in 12 days.
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