Turkish Lira, Markets Slump After Moody's Cuts Rating to Junk Status

ISTANBUL—The Turkish lira fell to a seven-week low against the dollar and stocks tumbled Monday after Moody's Investors Service on Friday downgraded Turkey's credit rating to junk status following a review that began after the failed coup attempt in July.

The lira weakened about 1% on Monday to trade as low as 2.9990 a dollar before rebounding slightly, and Turkey's main BIST-100 stock index was down nearly 4%. Meanwhile, the yield on two-year benchmark bond rose to 9% from its 8.68% close on Friday. Bond yields rise as prices fall.

The downgrade to Ba1 from Baa3, which is investment-grade, may prompt foreign investors, such as pension funds, to pull cash out of the country, said Gokce Celik, chief economist at Finansbank in Istanbul. "More importantly, it will lead to repricing of Turkish lira-denominated assets, pushing the cost of external borrowing higher while rendering the currency weaker."

After the Moody's cut, Fitch Ratings was the only agency keeping Turkey at investment grade, with Standard & Poor's having knocked the country deeper into junk status after the failed attempt to overthrow President Recep Tayyip Erdogan.

"Moody's expects growth will slow over the coming years, as constraints on the externally-funded, consumption-fueled economy emerge, the reform agenda slows further and the investment climate remains weak," the rating agency said in an emailed statement late Friday, adding that it expected "this slow deterioration" to continue for two to three years.

Turkish Economy Minister Nihat Zeybekci said Saturday that Moody's decision didn't match up with Turkey's fundamental macro dynamics. Deputy Prime Minister Mehmet Simsek tweeted on his official Twitter account that the government's best response to credit-rating firms would be to accelerate structural reforms and maintain fiscal discipline.

Moody's placed Turkey's credit rating on review for downgrade on July 18, just after the coup attempt.

Write to Yeliz Candemir at yeliz.candemir@wsj.com

(END) Dow Jones Newswires

September 26, 2016 06:45 ET (10:45 GMT)

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