Turkish lira in the middle of the night

Financial markets in Turkey have experienced a fresh period of turmoil, putting the country’s recovery from recession at risk and raising questions over the health of emerging markets as the world economy slows.

President Recep Tayyip Erdoğan’s government heaped pressure on Turkey’s banks on Wednesday to stop them lending the lira to overseas financial institutions, in a move that triggered the cost of offshore borrowing in the Turkish currency to surge by more than 1,000% overnight.

Turkey’s main index of leading company shares, the Borsa Istanbul 100, closed down 5.7% in the biggest daily drop since July 2016, as analysts warned that some investors had opted to sell local stocks instead of betting on the currency.

The lira-dollar swaps are becoming more expensive after Turkish banks slashed their lending to foreign counterparties offshore. The rate had stood at 24 percent on Friday, equivalent to the Turkish central bank’s benchmark interest rate.

The surge in the cost of swaps came after the lira slumped more than 4 percent against the dollar on Friday in echoes of last year’s currency crisis. That prompted the central bank to suspend lending at its benchmark rate. Turkish regulators said on Saturday that they were investigating U.S. investment bank JPMorgan Chase & Co. for possible market manipulation.

Citigroup and Deutsche Bank may be among foreign banks that could also be punished for manipulating the lira, Hürriyet newspaper reported on Wednesday, citing an unnamed banker. Foreign institutions were caught in the swaps market and may not be able to maintain their positions for a third day, the banker said, referring to the surge in costs.

Paul McNamara, investment director at GAM, a Swiss asset management company, said on Twitter that he had heard some of the swaps had changed hands at a rate of 750 percent, though data screens were showing the price at 600 percent.

Offshore funds were clamouring to close long-lira positions and were failing to find counterparties, Bloomberg reported on Tuesday citing two people with direct knowledge of the matter.

While analysts said that Turkey’s problems were likely to be contained, the country was among the first emerging markets to run into difficulty last year as global investors bet against developing economies’ currencies.

The issues in Turkey come after Erdoğan promised to battle speculators ahead of local elections at the weekend. The country’s economy also remains weak and is still recovering from unrest in the financial markets last summer.

In a speech on Sunday, Erdoğan warned investors they would pay “a heavy price” for betting against the lira as he took to the campaign trail, rekindling fears among global investors that the government would intervene in the markets.

Analysts said on Wednesday that Turkish banks appeared to have halted offshore lira lending, making it harder for foreign institutions to speculate against the currency, until at least after the local elections on Sunday.

The head of the Turkish banking association denied the reports, saying Turkish banks were not the source of the squeeze and were taking business-based decisions and had operated within international laws and regulations.