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US sanctions to have limited effect on economy, minister says as lira tumbles

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US sanctions imposed on Turkey over the trial of an American pastor accused of backing terrorism are unacceptable and will have limited impact on the Turkish economy, Treasury and Finance Minister Berat Albayrak said, as the Turkish lira tumbled to a record low beyond 5 to the dollar on Thursday, according to Reuters.

Albayrak said Turkey’s priority was to resolve the issue with Washington, a NATO ally, through dialogue and diplomacy. Speculative actions in financial markets following the announcement of the sanctions would be rendered void, he said.

Albayrak also said in a statement that Turkey was working on securing short and medium-term external financing.

The lira sell-off, which also hammered local stocks and Turkey’s debt risk profile, reflected deepening investor concern over tensions with the United States, a major trading partner.

The White House announced sanctions against Justice Minister Abdülhamit Gül and Interior Minister Süleyman Soylu. It blames both men for involvement in the arrest and detention of Andrew Brunson, an evangelical Christian pastor from North Carolina who has lived in Turkey for more than two decades.

Brunson is charged with supporting the group Ankara blames for orchestrating an attempted coup in 2016. He denies the charges but faces up to 35 years in jail.

“Further escalation in the standoff could prompt further capital outflows and have a negative impact on the confidence in the economy,” said Jakob Christensen, head of emerging markets research at Danske Bank.

“This is one of the key risks for Turkey, but you also have the underlying structural weaknesses in the economy, which are exacerbating these geopolitical concerns.”

The cost of insuring Turkey’s debt against default spiked to the highest in more than six years, while the BIST 100 share index tumbled more than 2 percent, with banking stocks among the decliners.

The lira has lost a fifth of its value this year, battered by rising inflation and concerns over the central bank’s independence in the face of repeated calls by President Recep Tayyip Erdoğan for lower interest rates.

“If the Turkish response is a measured one, there might be room for a measured relief. But without more visible steps to deescalate, the medium to longer-term path for the lira would be weakness again,” said İnan Demir, senior emerging market economist at Nomura.

Relations between the United States and Turkey have plummeted over Brunson, who was in custody for 21 months in a Turkish prison until he was transferred to house arrest last week.

On Tuesday, a court rejected his appeal to be released from house arrest during his trial on terrorism charges.

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