A view of the Borsa Istanbul (BIST). Photo: Anadolu Agency via AFP/Serhat Cagdas

On Tuesday, Turkey’s main stock benchmark index fell below 100,000 points, continuing to fall along with the lira, which has been among the worst performing emerging market currencies of late.

Turkey’s stock market has now lost 28% in US dollar terms since its late January peak, and trades at the lowest multiple to earnings (6.6x forward earnings) of any major stock market in the world. The Turkish lira seems to decline on days when the market is open. Turkish swap rates are at 18% for one year. The cost of 5-year protection against default on Turkey’s foreign-currency government bonds has risen from about LIBOR +160 at the beginning of the year to LIBOR +240.

It’s a classic unwind of a Third World kleptocracy in which the ruling clique and its periphery issue themselves huge amounts of credit, and keep consumer credit pumping as well to win the temporary support of the middle class. Turkish banks face a funding squeeze after borrowing heavily in the foreign-currency interbank market to fund dollar and euro loans to their customers.

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