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The Turkish lira is sinking so fast it risks 'smashing into the ground' — and people are worried about European contagion

Michael Selby-Green
FILE PHOTO: Turkey's President Tayyip Erdogan looks on ahead of a meeting at the EU Parliament in Brussels, Belgium October 5, 2015. REUTERS/Francois Lenoir/File Photo

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  • The Turkish lira has fallen more than 10% against the dollar after a Turkish delegation in Washington failed to prevent US sanctions.
  • There are concerns that contagion could spread to Europe. The euro dropped below 1.15 against the dollar on Friday.
  • The lira "is falling so fast that a parachute is the first thing that comes to mind to prevent the lira smashing into the ground," Bart Hordijk, a market analyst at Monex Europe, told Business Insider.
  • Turkish President Recep Tayyip Erdogan and his newly appointed finance minister, Berat Albayrak, are due to speak at 2 p.m. local time Friday.
  • You can follow the lira price live on Markets Insider.

The Turkish lira hit an all-time low against the dollar on Friday, and there are growing concerns that the country's economic troubles could spread to the eurozone.

The lira fell 7% against the dollar to 5.9655 on Friday morning after hitting an all-time low earlier in the session. It has fallen by over 35% this year. The fall has come as Turkish President Recep Tayyip Erdogan has moved to take greater control of monetary policy.

The recent plunge comes after a Turkish delegation in Washington failed to stop the US from imposing sanctions against two senior ministers. The lack of central-bank action to support the currency is also spooking investors and Erdogan's previous comment that interest rates are the "mother and father of all evil" hasn't helped.

The lira "is falling so fast that a parachute is the first thing that comes to mind to prevent the lira smashing into the ground," Bart Hordijk, a market analyst at Monex Europe, said in an email.

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Concerns are mounting that the decline will start to hit European banks. The eurozone's chief financial watchdog has become increasingly concerned about the exposure of some of Europe's biggest lenders to the country. They include BBVA, UniCredit, and BNP Paribas, and the exposure to those lenders is being closely watched, the Financial Times reported.

The risk of contagion saw the euro fall by 0.5% against the dollar to 1.1471 at 10:15 a.m. BST (5:15 a.m. ET) on Friday.

Erdogan and his newly appointed finance minister, Berat Albayrak, are due to speak at 2 p.m. local time Friday. Erdogan has promised a new economic model driven by Albayrak, who is also his son-in-law.

Erdogan spoke briefly Thursday night and alluded to problems with the currency, saying "various campaigns" were underway, adding: "If they have dollars, we have our people, our righteousness and our God."

Hordijk said in an email: "President Erdogan is the elephant in the room ... It is time for Erdogan to face reality.”

A "gigantic rate hike" of at least 500 basis points to calm markets and a clear commitment from the Central Bank of Turkey to support the currency could help halt the decline, Hordijk said, adding, "Another bandage to stop the lira from bleeding to death would be capital controls, but Erdogan opposes these measures."

He continued: "A painful admittance that his powers are outmatched by the forces of markets and that he may have misjudged the economic situation may be a lot to ask of the autocratic leader Erdogan, but the alternative is that the lira will meet the ground at terminal velocity; an impact that will damage the Turkish economy for years to come."

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