Turkey’s Economic Troubles Spill Over

Turkey said early today it was abandoning its controlled currency program, allowing the lira to float in a dramatic bid to curb a financial crisis racking the country.

The move, after 12 hours of emergency talks, all but spelled the end of a three-year program launched amid high hopes in January 2000, and dealt a heavy blow to Prime Minister Bulent Ecevit. Inevitable devaluation may bring some social hardship.

On Wednesday, before the news was announced, concern about the Turkish economy hammered its markets and stock and bond prices in other developing markets.

Turkey’s benchmark 10-year bond dropped 15% in value in three days, driving its yield up more than three percentage points to a record 16.67%. Amid a political spat early this week, the country’s central bank had sought to prevent an outflow of cash, which caused overnight interest rates to surge as high as 6,200%.

Elsewhere Wednesday, Russian government bonds dropped more than 3% and Brazil’s benchmark “C” bond, Latin America’s most widely traded debt, fell 1.4%--both the steepest declines in four months. Argentina’s key bond yield rose to a two-month high.

“When there is a catastrophe in one emerging market, the appetite for risk reduces in other emerging markets,” said David Herne, fund manager at Brunswick Capital Management.

“Until the situation in Turkey has greater clarity, the market will continue to trade downward,” said Tulio Vera, chief debt strategist for emerging markets at Merrill Lynch & Co.

Emerging market stocks also fell, with Turkey’s benchmark stock index plunging 18% Wednesday, its biggest one-day drop ever.

Eastern European stocks also tumbled, as investors sold stocks such as RAO Unified Energy Systems--Russia’s monopoly power utility--and other stocks to cover losses in Turkish markets. UES, Russia’s most-traded stock, fell by as much as 13.7%, pushing the Russian benchmark RTS index down 8.1% in its biggest one-day fall in seven weeks.

In Latin America, shares in Brazil and Argentina helped lead declines. Brazil’s Bovespa index fell 2%, while Argentina’s Merval index tumbled 4.2%, a seven-week low. Mexico’s IPC index lost 3.8%.

The losses trimmed the year-to-date gains for markets that have been outpacing their U.S. counterparts recently.

The International Monetary Fund voiced support for Turkey’s decision to float its currency. In December, the IMF rescued Turkey from a liquidity crunch caused by a banking crisis. The agency boosted its lending program to the nation to $11.4 billion.

The extra cash came in return for progress on privatization, banking reforms, fiscal restraint and efforts to reduce inflation further.

The IMF said it believed that Turkey was committed to the existing economic program, despite the currency shift, which could send inflation soaring.

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Un-Emerging Markets

Turmoil in Turkey is causing stock and bond prices in other emerging markets to fall in sympathy, hurting shares of mutual funds that invest in those markets.

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Templeton Emerging Markets Income on Wednesday: $10.45, down 21 cents

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Templeton Emerging Markets on Wednesday: $8.94, down 16 cents

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Templeton Emerging Markets and Templeton Emerging Markets Income closed-end funds, weekly closes and latest on New York Stock Exchange

Source: Bloomberg News