The embattled Turkish lira (TRY) over September 17 and early September 18 gave up almost all the gains it made after last week’s major rate hike after investors were spooked by a call from President Recep Tayyip Erdogan for an investigation into members of the main opposition party who serve on the board of Turkey’s biggest lender, Isbank.

The market took his comments as a sign that the strongman might be preparing to nationalise the bank—as called for by one of his top aides in 2016—in another move to personally control major levers of the country’s economy. Erdogan—who last week made himself chairman of Turkey’s sovereign wealth fund and has almost unchallengeable powers as the first Turkish executive president—actually pleased investors on September 13 when, despite repeating his objections to interest rate hikes, he stood back as the central bank went ahead with 625 basis points of monetary loosening. But his comments on Isbank caused a fresh wave of jitters.

Hurriyet newspaper quoted Erdogan as saying authorities should look into members of the Republican People’s Party (CHP) in relation to the party’s 28% stake in Isbank. It was bequeathed to the CHP by Mustafa Kemal Ataturk, founder of the Turkish Republic, who was behind the creation of the bank in 1924 with a personal capital contribution. While the CHP does not receive dividends from the stake—they go to cultural associations, as stipulated by Ataturk’s will—party members are entitled to seats on the bank’s board.

“What do they do?”
“It [the CHP] owns 28% of Isbank shares. It can’t get money from there but it has four board members. What do these four members do? This must be looked into,” the newspaper quoted Erdogan as telling reporters on his plane returning from Azerbaijan.

By around 12:25 local time on September 18, the TRY was weaker by around 3% against the dollar at TRY6.35 levels compared to the rate it stood at after the impact of the much welcomed rate increase. Dollar-denominated bonds issued by Isbank fell across the curve on September 17. The lender’s 2028 eurobond fell over 1 cent in the dollar to 61.2 cents, according to Tradeweb, while the 2023 issue fell 0.8 cents to 70.1 cents. The bank’s shares also tumbled, by 5.8% d/d.

“Market hating Erdogan’s comments [about Isbank],” Timothy Ash of BlueBay Asset Management said in a note to investors.

Fears about Erdogan’s growing authoritarianism, buttressed by his re-election in the June polls, and a lack of central bank independence have helped send the lira down by around 40% vs the USD this year. The president’s move to appoint his son in-law Berat Albayrak in his post-election cabinet reshuffle has also caused some consternation.

“It’s [Isbank] the only bank he [Erdogan] can’t control because of their ties to the CHP,” Yuval Polushko, a currency trader a Spectra FX Solutions in London, remarked to Bloomberg, adding that it was “very tough to call the lira at the moment”. Despite the introduction of the rate hike long desired by investors, the lira has not yet managed to break through 6 per dollar. Its all-time weakest rate of 7.24 came in early August.

In a filing with the stock exchange on September 17, Isbank said it was too important “to be made a subject of political debate”.

 “After Ataturk passed away, his shares were transferred to the CHP,” the bank explained in the filing.

“Currently, 31.79% of Isbank's shares are on free float. The majority of the shares are owned by the Isbank Supplementary Pension Fund, which represents the employees and retirees of the bank, with a 40.12% share; while Ataturk Shares constitute 28.09% of the total,” the bank added.

“There have been cases where Ataturk Shares have been represented either jointly or separately by CHP and the Treasury. However, this has had no impact on the operations and business model of the bank,” it also noted.