Turkey's lira weakens, bank shares fall after Erdogan Isbank comments

ISTANBUL: Turkey's lira weakened 2 percent and banking shares fell on Monday after President Tayyip Erdogan was quoted as calling for an investigation into members of the opposition who serve on the board of the country's biggest lender.

The lira's decline - it fell as far as 6.3300 to the dollar in afternoon trade - all but erased the gains made since the central bank's mammoth interest rate hike of 6.25 percentage points last week.

The Hurriyet newspaper on Monday quoted Erdogan as saying authorities should look into members of the main opposition  Republican People's Party (CHP) over its 28 percent stake in Isbank, bequeathed to the bank by Mustafa Kemal Ataturk, founder of the Turkish Republic.

While the CHP does not receive dividends from the stake - those go to cultural associations, as stipulated by Ataturk's will - party members do have seats on the bank's board.

"It owns 28 percent 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," Hurriyet quoted Erdogan as telling reporters on his plane returning from Azerbaijan.

The lira stood at 6.2900 to the dollar at 1515 GMT. Isbank shares fell nearly 6 percent and the sell-off extended to the broader banking index, which dropped 2.4 percent.

Isbank dollar bonds also fell.

"Market hating Erdogan's comments" about Isbank, said Timothy Ash of BlueBay Asset Management in an email.

Erdogan and his aides have previously called for greater scrutiny of the CHP over the stake. One of his aides in 2016 called for its nationalisation.

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Since gaining expanded executive powers in July, the president has tightened his grip on the economy and monetary policy, appointing his son-in-law, Berat Albayrak, as finance minister and taking charge of the sovereign wealth fund.

Fears about growing authoritarianism and a lack of central bank independence have helped send the lira down 40 percent this year.

Investors are also looking ahead to Albayrak's medium-term economic progamme, due to be announced on Thursday. He has promised cost-cutting measures and more efficient spending as the economy enters an expected sharp slowdown.

Separately, companies will no longer be required to count foreign-currency losses when assessing whether to file for bankruptcy, according to a legal change introduced at the weekend, a move that could dent productivity by propping up unhealthy companies.

On Monday the banking watchdog relaxed limits imposed on banks' foreign exchange swaps and similar instruments, after last month limiting the transactions to 25 percent of a bank's equity.