The political violence in Turkey has seriously unsettled investors, creating worries about the effect it could have on the economy .
On Monday, the main stock market index in Istanbul ended the day down almost 10.5 percent and the value of the currency – the lira – slumped to its lowest in 16 months against the US dollar.
In addition the government’s cost of borrowing jumped, along with the amount that bond holders are having to pay to insure against Ankara defaulting on its debt.
The clouds of tear gas have choked off market optimism that followed last month’s upgrade of the economy by the credit rating agency Moody’s. It was the second agency to increase the country’s bonds to investment grade.
Erdogan’s comments “not encouraging”
Tough talk from Prime Minister Erdogan did not reassure investors as he spoke about the demonstrations having been organised by “extremist elements”.
“The risk clearly is that this all just drags on and then the danger is that violence racks up a notch taking this to an entirely different level – further heightening tensions and entrenching positions,” said Timothy Ash, head of emerging markets research at Standard Bank.
He said Erdogan’s comments did not seem to show the prime minister adopting a softer line and indicated he would not bow to pressure, which Ash described as “not very encouraging”.
“I would expect the Turkish authorities, particularly the central bank, to be active in re-assuring investors. For the central bank, the problem is that the lira was weak last week on global market concerns,” he said.
The two-year benchmark government bond yield rose to 6.48 percent from 6.07 percent late on Friday. The yield on the 10-year bond yield climbed to 7.12 percent from 6.84 percent.
The volume of trade on the bond market was extremely low, however, with big banks behaving cautiously.
“We can see major banks are not trading bonds. Their bond portfolios are very large, they don’t want to price such a big movement,” said one senior banker. “The central bank has not yet shown what sort of a step it will take.”