The detention of Istanbul Metropolitan Mayor Ekrem İmamoğlu has caused the Borsa Istanbul index to experience extreme losses. The strategic selling behavior initiated during İmamoğlu's arrest in the BIST 100 index maintained its course through March 21. The BIST 100 Index fell 7.81% on Friday to drop below 9000 points. Borsa İstanbul finalized the week at 9,044.64 points. The Index-Based Circuit Breaker system operated twice during the day on Friday. The circuit breaker system implemented its measures for a second time on March 19. The banking index suffered its biggest decline in recent years when it fell more than 26% within one week as the national currency dropped more than 12% against the US dollar. The exchange rate between the US dollar and euro reached 42 and 45 Turkish lira, respectively. The Turkish Central Bank made $10 billion worth of foreign exchange market interventions, according to the Reuters reports. The dollar declined to 37 lira levels, and the euro depreciated to 40 lira following the implemented measures on March 21.
The Index-Based Circuit Breakers were used twice as the concept functions as an emergency control mechanism within stock market operations. The automatic stock market trading stoppage occurs from a 5% drop in the stock market index. The initial circuit breaker maintains an operational time of twenty minutes. Following the 20-minute delay, a five-minute order collection duration begins. Trading stops temporarily, and all stocks apply a single-price mechanism, which uses the trigger point value during this period. Then, the market reopens. After trading resumes, the system restarts if the stock market index decreases by 7%, leading to an extended trading suspension.
Even though the turmoil is lessened by the immediate measures, the present state is still along with uncertain risks, according to economist İris Cibre. Foreign investors have initiated stock and bond sales, as Cibre observed in his analysis. According to Cibre, foreign investors initiated a dollar-selling spree because they believed Türkiye would experience a currency attack. The simultaneous selling led to massive market disorder. According to Cibre, foreign investors chose not to keep their stocks from Friday through the weekend because trading ended that day. She added that bank stock declines emerged from foreign investor withdrawals.
Economic writer and journalist Hayri Kozanoğlu said in an interview with BBC Turkish that uncertainty in the country’s politics negatively affects the stock market. Kozanoğlu emphasized that investments in stocks have a medium, and long-term perspective, and the rise in CDS premiums to around 330 dollars also "confirms this negative impact on the country." According to Kozanoğlu, another factor is the slowdown in the demand for foreign currency due to reserve sales. He explained that the depreciation of the Turkish lira caused an automatic decline in the index in dollar terms and added, "Considering the possibility of a currency spike in the coming days, there could be an acceleration of foreign exits." Kozanoğlu noted that the high interest rates are "negative for the stock market" because they are a direct cost for companies and make interest-bearing instruments relatively more attractive. He linked the sharp declines to, among other factors, "forced sales by investors with leveraged positions and panic sales triggered by the downward trend." Regarding the decline in banking stocks, Kozanoğlu said that foreign investors had made significant investments in valuable banks and holdings in the larger market, and "this is why the exits from their $35 billion portfolios had a more negative impact on these areas." Kozanoğlu noted, "The rise in interest rates is expected to negatively affect banks since the maturity of assets will be longer than their liabilities."
Prof. Dr. Ümit Akçay, a lecturer at the Berlin School of Economics and Law, believes that the economic turmoil after İmamoğlu's detention should be viewed in a broader context. He pointed out that a bigger currency shock had been avoided, which he considered a "win" for exporters, stating that "exporters had long been lobbying for a weak lira, and now they have achieved part of the devaluation they sought." Akçay mentioned that the Central Bank might revise its inflation target upwards, which "could lead to more instability in the coming days." He also noted that the market's focus has again turned to the Central Bank's foreign exchange reserves. Akçay stated that the increasing foreign currency demand could put pressure on the Central Bank to maintain high interest rates. The continuation of the high-interest period could lead to "delayed economic recovery and the risk of stagnation." Akçay warned that the government's efforts to limit foreign currency demand might bring back measures similar to foreign exchange-protected Turkish lira deposits. He concluded that "capital flight from the country can be mitigated through more interventionist policies."
Ekrem İmamoğlu's arrest caused severe consequences for Türkiye's financial markets, which led to Borsa İstanbul index losses, whereas emergency measures, including index-based circuit breaker activation, became necessary. The politically uncertain future of Türkiye under the the attacks of democracy from the ruling regime resulting with decreased foreign investment and economic turmoil has developped to a significant weakening of investor confidence. Market volatility continues to rise because of Turkish lira depreciation together with higher interest rates and foreign currency interventions. The present situation reveals how political events combine with financial stability to require well-planned market recovery methods that will rebuild investor trust.
Edited by: Yağmur Ece Nisanoğlu