Turkey crisis sends lira to new low as investors spooked

ISTANBUL (AFP) - The Turkish lira touched a new low against the dollar and shares also slid on Thursday, under pressure from a corruption scandal roiling the government.

The lira fell to 2.1740 after earlier hitting a record low of 2.1828 to the dollar while the main Istanbul stock exchange index lost 1.20 per cent to 66,985.81.

Turkey's financial markets have tumbled on political jitters with Prime Minister Recep Tayyip Erdogan's government rattled by a corruption probe that has targeted several key allies.

Although Turkish leaders have sought to play down the impact of the crisis on the once fast-growing emerging economy, analysts warned that investors have taken flight.

"If the political situation remains volatile for a prolonged period, the economic consequences could potentially be severe," London-based Capital Economics said in a report. "With the recent scandal following the outbreak of widespread protests in the summer, it does seem that Turkish politics are becoming increasingly unpredictable. Investors have clearly been spooked," it said.

The lira's continuing fall is despite a central bank decision last week to sell off some of its dollar reserves to shore up the currency, which has also been hit by the scaling down of the US monetary stimulus policy.

Deputy Prime Minister Ali Babacan insisted Thursday that the impact of the political crisis in Turkey - once regarded as a model of stability - was temporary.

"It is a temporary situation. It is to do with the political perception," Babacan told a business conference in Ankara.

He had said on Tuesday that the government's economic growth forecast for 2014 remained at four percent despite the turmoil - although it is sharply down from the growth of nearly nine per cent in 2010.

The government says it is the victim of a plot by rivals seeking to topple Erdogan, including a group headed by a powerful exiled Turkish cleric. "The target may seem to be the government, but when you look at the stock market, you can see that the target is the whole of Turkey and its people," Babacan added.

"We will not let anyone take this environment of trust and stability from us."