ISTANBUL — Turkey's financial markets are being investigated by the country's regulatory board. The investigation, as well a global sell-off in developing economies and anti-government protests, is threatening the faith in the country's capital markets.
The Ankara-based Capital Markets Board launched the probe after a massive exit from Turkey by foreign investors starting in late May, which caused stocks to plummet, raised borrowing costs significantly and sent the currency to record lows against the dollar.
The investigation is looking at whether the markets were illegally manipulated. The move comes as Turkish Prime Minister Recep Tayyip Erdogan continues to blame an international financial conspiracy for fomenting the ongoing anti-government protests.
Atilla Yesilada is an analyst with political consulting firm Global Source Partners. He says the investigation is a worrying sign.
"These are very well documented transactions. They could simply ask the central bank to provide all the bank data they need. Why are they going after the banks? And to top that, why are they asking banks what they did with the money they purchased in those auctions? I really don't know. There seems to be no rational explanation except. A: They are trying to intimidate the banking community; or, B: The manipulation investigation has reached a point where they are really looking for the final piece of evidence to take it to the prosecution stage. At a time when financial sentiments are really fragile, these are not the appropriate measures to restore faith in the Turkish markets," said Yesilada.
Inan Demir is chief economist for the Istanbul based Finansbank. He also warns it's not the time to frighten foreign investors.
"Turkish growth performance has been very closely linked to the availability of foreign capital because of a chronic lack of savings at home. Now it's not that I don't expect Turkey to roll over its debt that is going to mature in the next 12 months. But with global liquidity less abundant, it could be more costly for Turkey, in the sense that it could have to pay higher interest rates to roll over those debts. Then growth is likely to suffer," said Demir.
In the next 12 months Turkey has to pay back or roll over about $200 billion in debts. At the same time, international capital flows are needed to sustain one of the world's largest current account deficits, which rose again this month.
Analyst Yesilada points out that with no person or company as of yet charged with wrongdoing, international investors appear to be keeping their nerves.
"So far nobody has been hurt and most of the global fund managers are veterans of domestic turbulence, and many discount as what is happening now in Turkey as just political rhetoric. I am afraid slightly more than that, and if I am correct, the shock waves would be of the nature of a major earthquake," he said.
This week, Erdogan appointed Yigit Bulut as his chief adviser. Bulut is one of the most vocal advocates of the idea that a financial conspiracy is responsible for the unrest, so it appears there is little chance of the government halting the investigation. Observers warn in such a climate, the current investigation of financial manipulation could extend to more serious charges of conspiring against the government, which could likely further unnerve international financial markets.