Turkish lira near record lows after Moody's downgrade

ISTANBUL: The lira hit a record low against the euro and was at its weakest-ever levels against the dollar on Monday after Moody's downgraded Turkey's rating to 'B2' from 'B1' late last week, and warned of a deeper economic crisis.

The ratings agency said Turkey's external vulnerabilities are likely to result in a balance of payments crisis and that its fiscal buffers were eroding as it cut the sovereign rating deeper into junk territory.

At 1035 GMT, the lira stood at 7.4970 against the dollar, equalling its record low of last week. The currency hit an all-time low of 8.8938 against the euro.

"Turkey's prospects have materially weakened. The possibility of a funding shock continues to be the key risk facing the Turkish economy," said Ehsan Khoman, head of MENA research and strategy at MUFG Bank.

He said it was especially worrying that Moody's kept a negative outlook on Turkey even after the downgrade.

The ratings agency said FX reserves versus GDP were at lows not seen in decades due to the central bank's unsuccessful attempts to defend the lira this year. Authorities' "inadequate reaction function" makes "a full-blown balance of payments crisis in the coming years" more likely, Moody's said Friday.

Turkey's dollar-denominated government bonds fell, with some losing more than 1 cent on the dollar. Credit default swaps rose 4 basis points from Friday to 513.

Nonetheless, expectations remain low that the central bank will raise its policy rate at a meeting next week. Rather it could continue with weeks of backdoor credit tightening that has raised the average cost of funding to 10.29% on Friday, from 10.15% where it had steadied last week.

The lira is also under pressure from a standoff between Turkey and Greece over exploration for hydrocarbons in dispute waters in the eastern Mediterranean, with the European Union having warned of sanctions against Turkey over the issue.

Moody's said the dispute posed another risk that could accelerate a crisis.

However, the survey vessel at the centre of the dispute returned to waters off southern Turkey on Sunday in a move Greece said was a positive first step. Foreign Minister Mevlut Cavusoglu said Turkey did not expect to face EU sanctions.

While concerns persist about the country's recovery from a sharp economic slump due to the coronavirus pandemic, data on Monday showed industrial production rose at a greater-than-expected 4.4% year-on-year in July.