“Who would want to invest in a currency that’s valuation is only based on fear?” a senior Commerzbank analyst reportedly remarked on May 25 as the markets digested Turkey’s move to place JPMorgan Chase & Co and other unnamed banks under investigation following the latest slump in the value of the Turkish lira.

On March 24, the day after Turkish watchdogs announced the probes, Turkish President Recep Tayyip Erdogan, facing landmark local elections widely seen as a referendum on his rule on March 31, followed up by warning bankers that there would be “a heavy price” to pay after the polls. Lashing out at bankers whom he sees as driving up demand for hard currency and making misleading predictions on foreign exchange rates, Erdogan warned at an Istanbul election rally: “I am calling on those who are engaging in such activities ahead of the elections. We know the identities of all of you. We know what you are doing.”

Ulrich Leuchtmann, head of FX & EM Research at Commerzbank in Frankfurt, was also quoted by Reuters as saying: “With archaic measures of this kind he [Erdogan] will scare away even the last courageous Turkey investor.”

March 22 saw the Turkish lira (TRY) weaken 5.42% d/d against the USD to close last week’s trading at 5.76. It was the first major weakening of the currency since the lira crisis last summer. However, by around 19:00 on March 25, the TRY had strengthened by 3.33% to 5.57. Whether or not populist Erdogan’s menacing words had delivered most of that recovery was certainly on bankers’ minds.

Turkey CDS jump 27 bp
March 25 also saw the cost of insuring exposure to Turkey’s sovereign debt soaring to a six-month high. Turkey 5-year credit default swaps (CDS) leapt by 27 basis points to 426 bp, IHS Markit data showed. Such a level was last recorded last September after August’s big lira selloff.

Turkish money market rates also jumped for a second successive session, Reuters reported. Rates for borrowing 1-month funding in 9-month’s time and 3-month funding in 9-month’s time hit more than 29%.

Turkey’s main interest rate is currently 24%.

Traders on March 25 also took note that Turkey’s dollar-denominated bonds were again on the slide. The biggest fall hit the country’s 2034 bonds which dropped 1.3 cents in the dollar while other maturities slid between 0.2 and 1 cents according to Tradeweb data.

The Turkish Central Bank started the new trading week by saying that it intended to use all monetary policy and liquidity management instruments to maintain price stability if deemed necessary. It said it was closely monitoring fluctuations and unhealthy price formations following the lira plunge three days ago.

The national lender said recent fluctuations in gross reserves were driven by ordinary transactions and periodic factors. There were no unforeseen incidents, it said, adding that it was decisive about its policy towards reinforcing its reserves.