(Adds Erdogan comments, updates numbers)
By Daren Butler
ISTANBUL, July 11 (Reuters) - Fall-out from Turkey’s tumbling lira hammered banking shares on Wednesday, sending the Istanbul stock market to its biggest one-day fall in two years and highlighting worries about economic management under a new presidential system.
The main share index dropped more than 5 percent while bank stocks lost more than 9 percent in their worst day for five years as investors fretted over President Tayyip Erdogan’s influence on monetary policy.
Erdogan, who describes himself as an “enemy of interest rates” wants lower borrowing costs to spur economic growth. Investors, however, believe the credit-fuelled economy is overheating and want decisive interest rate increases to tame double-digit inflation.
Hours after being sworn in with sweeping new powers as executive president, Erdogan appointed his son-in-law Berat Albayrak to the newly created post of treasury and finance minister on Monday.
Foreign investors took that as a sign that Erdogan, who won re-election last month, plans to take even greater control over the economy and ultimately will have more say over monetary policy.
“In order to build confidence among both foreign and domestic investors, there must be a narrative which is not divorced from the market reality,” said Seda Yalcinkaya, an analyst at brokerage Integral.
The selling accelerated later in the day after local media quoted Erdogan as saying he believed interest rates would fall. That helped to send the lira to its weakest since May 23, the day the central raised interest rates at an emergency meeting to shore up the currency.
The lira stood at 4.8270 to the dollar at 1553 GMT, weakening more than 2.5 percent from Tuesday’s close of 4.7062. It hit a low of 4.8492 earlier.
The currency has lost more than a fifth of its value against the dollar so far this year, hit by worries that Erdogan’s drive for lower rates would erode the central bank’s ability to fight inflation.
Investors are also selling bank stocks, reflecting fears that Turkish lenders could face a wave of bad debts as overextended companies struggle to repay foreign-currency loans. Turkish firms had $225 billion in long-term, overseas borrowings as of April, almost all in dollars or euros, central bank data shows.
“Decision making is increasingly centralised,” Standard & Poor’s senior sovereign analyst Frank Gill said this week. “Where is the growth going to come from, given that we feel the funding capacity of the banks is close to exhausted?”
Moody’s, another credit ratings agency, has warned that Turkish banks could face a jump in problem loans if the lira continues to weaken, citing an estimated $78 billion in short-term foreign exchange refinancing needs.
The Istanbul bourse’s index of bank stocks fell 9.19 percent by Wednesday’s close, recording its biggest one-day fall since June 2013.
The BIST 100 stock index fell 5.18 percent, recording its biggest one-day fall since a failed military coup attempt in July, 2016. The yield on Turkey’s benchmark 10-year bond rose to 18.48 percent from 17.36 percent at Tuesday’s close. (Additional reporting by Behiye Selin Taner Writing by Ezgi Erkoyun and Ali Kucukgocmen Editing by David Dolan and David Stamp)