The Turkish lira fell again on Friday, breaking a three-day quiet spell in the country currency crisis, after the US threatened to impose new sanctions on the NATO country.
The lira dropped about 5 percent, to about 6.11 per US dollar, after US President Donald Trump posted a tweet warning the country of more punitive measures over the continued detention in Turkey of US pastor Andrew Brunson, an evangelical pastor who faces 35 years in prison on charges of espionage and terror-related charges.
Turkish Minister of Customs and Trade Ruhsar Pekcan said her government would respond to any new trade duties.
Dashing hopes for a quick solution to the dispute, a Turkish court on Friday rejected an appeal for the pastor’s release from house detention. Upholding a lower court’s decision earlier this week, it also ruled against lifting a travel ban imposed on Brunson.
Meanwhile, Turkish President Recep Tayyip Erdogan has consolidated power over the central bank, and pushed for it to refrain from raising interest rates to support the currency, as experts say it should.
The diplomatic dispute is worsening investors’ concerns about Turkey’s economic problems. The country has amassed high levels of foreign debt to fuel growth in the past few years and as the currency drops, that debt becomes so much more expensive to repay, leading to potential bankruptcies. Economists are worried about a recession.
The turmoil led ratings agency Moody’s to downgrade Turkey’s credit rating further into “junk” status and slap a “negative” rating on its outlook. Moody’s stripped Turkey of its investment-grade rating in 2016 and Friday’s move lowered it one rung further.
The downgrade was triggered by what it described as a further weakening of Turkey’s public institutions and a related reduction in the predictability of Turkish policymaking, Moody’s said.
Debt rating downgrades typically mean higher borrowing costs as investors demand steeper interest rates to take on riskier debt.
Its negative outlook reflects its expectation that there is likely more financial stress on the horizon for Turkey, Moody’s said.
Standard & Poor’s also on Friday cut Turkey’s sovereign credit rating deeper into “junk” territory, citing extreme lira volatility and forecasting a recession next year, adding to the country’s woes as it deals with a currency crisis.
The rating agency downgraded the rating by one notch to “B+” from “BB-” and kept Turkey’s outlook at “stable” after the lira this year lost about 40 percent of its value against the US dollar.
“The downgrade reflects our expectation that the extreme volatility of the Turkish lira and the resulting projected sharp balance of payments adjustment will undermine Turkey’s economy. We forecast a recession next year,” Standard & Poor’s said.
It also forecast that inflation would peak at 22 percent over the next four months, and said the weakening lira was putting pressure on the indebted corporate sector and had considerably increased the funding risk for Turkey’s banks.
“Despite heightened economic risks, we believe the policy response from Turkey’s monetary and fiscal authorities has so far been limited,” the statement added.
Additional reporting by Reuters
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