LONDON, (Reuters Breakingviews) - The United States is hitting Turkey where it hurts. A day after President Donald Trump imposed sanctions on several of the country’s ministers and government departments due to its incursion in Syria, American prosecutors charged state-owned lender Halkbank over a multibillion-dollar scheme to evade U.S. restrictions on dealing with Iran. The charges, which the bank denies, look like a calculated attack on Turkey’s vulnerable financial system.

Halkbank’s alleged role in the saga, which used gold-trading to circumvent sanctions on Iran, has been public for almost six years. Talks between Trump and Turkish President Tayyip Erdogan may have persuaded prosecutors to hold back. Now, though, the gloves are off. The indictment identifies Turkey’s prime minister at the time as ordering the gold-selling scheme to restart after it was halted. That prime minister was Erdogan, who on Wednesday said the indictment was unlawful.

For big international banks, a U.S. government lawsuit would be the equivalent of a death sentence, because it undermines the confidence of regulators, customers and counterparties. That is why almost all lenders aim to settle their cases before charges are brought.

It is less of a problem for Halkbank, which mostly operates inside Turkey. Even so, a large fine would hurt. With a core Tier 1 capital ratio of 9.8% at the end of June, it’s the worst capitalised major Turkish lender, according to Fitch. Along with state-owned peers Ziraat Bankasi and Turkiye Vakiflar Bankasi , it has been providing low-interest loans in the wake of last year’s currency crisis to support the government’s lending-fuelled growth. State banks are also helping prop up the lira by selling dollars on some days and refusing to act as counterparties to foreign lenders that want to bet against the currency.

Ankara would probably step in to help Halkbank absorb any penalty, limiting the systemic risk. The government’s decision to ban short selling of shares in larger banks on Wednesday limits the stock market fallout. However, it also signals a concern that loss of confidence could spread to other institutions.

Nervous counterparties have had plenty of warning to avoid Halkbank; the yields on its bonds have been persistently higher than other Turkish banks. The more worrying development is the implication that, as tensions escalate over Syria, Turkey’s economically vulnerable banking system is now a legitimate target.

CONTEXT NEWS

- U.S. prosecutors on Oct. 15 charged Turkey's majority state-owned Turkiye Halk Bankasi (Halkbank) with taking part in a multibillion-dollar scheme to evade U.S. sanctions against Iran a day after President Donald Trump sanctioned several Turkish ministers and departments over Ankara’s Syria assault.

- Borsa Istanbul on Oct. 16 said it was temporarily banning short selling in banking shares within the top BIST 30 Index including Akbank, Turkiye Garanti Bankasi, Halkbank, Turkiye Is Bankasi, Turkiye Vakiflar Bankasi and Yapi ve Kredi Bankasi.

- Shares in Halkbank were down 3.9% at 0804 GMT on Oct 16. U.S. dollar bonds issued by the lender also fell.

(Editing by Peter Thal Larsen and Oliver Taslic)

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