(Bloomberg) -- Turkish regulators moved to limit the impact on financial markets after the U.S. targeted a leading bank in what amounted to a reprimand of President Recep Tayyip Erdogan’s military incursion in Syria.
The government measures, including a ban on short-selling of seven banks and a renewed liquidity squeeze in offshore money markets, stemmed a rout in financial institutions and buoyed the lira. Early declines followed U.S. criminal charges against state-run Halkbank, one of the nation’s largest.
The legal action raised concern in Turkey that the U.S. may impose tougher penalties, just as the $722 billion economy -- heavily reliant on foreign capital -- is starting to recover from a recession. Wednesday’s sell-off would have been much worse without intervention, investors said, compounding a bad month for Turkish assets.
“Brokers are reluctant to accept sell orders in bank stocks from foreign institutional investors, and this seems to be restraining the drop,” said Can Oksun, senior manager of institutional sales at Global Securities in Istanbul.
After falling more than 2% at the open, the benchmark index of Turkish stocks pared declines to trade down 1.4%, holding just above the lowest level since June. The lira also limited losses as state banks were selling dollars to support the currency, according to three traders with knowledge of the matter.
An indictment filed Tuesday in a Manhattan federal court accused Halkbank, whose full name is Turkiye Halk Bankasi AS, of participating in a wide-ranging plot to violate prohibitions on Iran’s access to the U.S. financial system.
“The timing of these charges would appear to be less than coincidental and is clearly highly politicized,” said Julian Rimmer, a trader at Investec Bank in London. “This is another warning shot across Turkey’s bow.”
Halkbank itself said in a filing that the indictment was among sanctions against Turkey’s military operation in Syria. The bank will exercise all legitimate rights against the “unwarranted case” under international law, it said.
On Monday, President Donald Trump sanctioned three senior Turkish officials and increased steel tariffs, a milder punishment than expected. U.S. lawmakers in both parties are pushing for stricter measures.
Turkey’s market support may have unintended consequences, however. If investors are unable to sell bank shares, they may begin offloading other assets. And those unable to fund their positions in the lira market may come under similar pressure.
Regulators last orchestrated a liquidity squeeze in the offshore market in March, limiting a key source of lira liquidity for foreign investors in Turkish assets. The move drove overnight swap rates above 1,000%, burning short sellers and forcing investors to dump assets as they scrambled for funding.
“There will be a price,” said Timothy Ash, a strategist at BlueBay Asset Management in London.
The Trump administration has called for an immediate cease-fire in Syria after the cross-border incursion earlier this month. Erdogan rejected that demand.
U.S. Vice President Mike Pence will meet Erdogan on Thursday in Ankara to reiterate Trump’s commitment to sanctions, according to a White House statement. Secretary of State Mike Pompeo, National Security Adviser Robert O’Brien and Ambassador James Jeffrey will also be on the trip that begins Wednesday.
The lira has weakened more than 4% this month as tensions built with the U.S. The yield on Halkbank’s dollar bond due 2021 surged more than 380 basis points.
Turkey Advises Banks Against Offering Lira Liquidity Offshore
The benchmark Borsa Istanbul 100 Index was trading 1.4% lower as of 2:45 p.m in Istanbul, led by Turkiye Garanti Bankasi AS and Turk Hava Yollari AO. The lira edged 0.2% higher to 5.90 per dollar while the yield on two-year government bonds jumped 48 basis points.
“The Americans intend to use these charges as leverage,” Rimmer said. “And given they can impose almost unlimited fines and heavy penalties, the Turks will have to take this seriously.”
(Updates market information, adds comments.)
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