Turkey attempts to calm markets as crisis deepens

Turkish policy makers made their first move to bolster the financial system and investor confidence amid a plunge in the lira. The currency, stocks and bonds extended their decline.

Promising to “take all necessary measures,” the central bank in Ankara lowered the amount commercial lenders must park at the regulator and eased rules that govern how they manage their lira and foreign-currency liquidity. While there was no mention of higher interest rates, it said all options were on the table. “The central bank will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary,” according to the statement released early Monday.

It’s all part of an action plan announced by Treasury and Finance Minister Berat Albayrak late Sunday to respond to market tumult. He also rejected capital controls as an option to stem outflows of hard currency and vowed to crack down on those he said were spreading damaging rumors that deposits would be seized. Albayrak has visited Kuwait and was expected to visit other members of the Gulf Cooperation Council seeking investment, according to Kuwait’s Al Jarida newspaper.

A dispute between NATO allies Turkey and the United States — which reached new intensity over the detention of an American pastor — has hammered the lira and also raised questions over the future partnership between Washington and Ankara. It caused global market jitters last week as investors fretted over potential economic contagion from Turkey, particularly to European banks.

The lira briefly trimmed losses after the central bank statement but weakened about 6.6 per cent to 6.8819 to the dollar at 12.02 pm in Istanbul. The yield on two-year government bonds jumped 94 basis points to 25.74 per cent, the highest level since the global financial crisis in 2008. The cost of insuring Turkish debt against default over five years surged more than 100 basis points to 537 basis points, while the benchmark stock index dropped as much as 4.6 per cent.

US sanctions

The currency has lost about a quarter of its value against the dollar since the US sanctioned two ministers in President Recep Tayyip Erdogan’s government in a spat over the continued detention of an American pastor in Turkey, pushing the economy toward a full-blown financial meltdown.

After Albayrak’s comments on Sunday, the banking regulator put restrictions on dollar-lira swaps in an attempt to make it harder for offshore investors to bet against the currency. The use of fringe tools is unlikely to be a “game changer” for the lira, Global Securities analysts including Research Director Sertan Kargin said in an emailed report. “The latest liquidity measures could provide some buffer to cushion the lira against speculative moves,” the report said. But the move “remains insufficient to provide full protection for the lira in times of distress in the absence of an outright orthodox rate hike.”

Over the weekend, Erdogan lashed out at the US, threatening to find new alliances and new markets for the economy’s vast financing needs. He also took higher interest rates off the table and said Turkey wouldn’t accept an international bailout.

The central bank’s initiative was praised by Adnan Bali, chief executive officer of Isbank which is Turkey’s biggest listed bank by assets. He said the regulator’s move was well executed but needed to be supported by “technical decisions.” Bali said interest-rate increases can sometimes be necessary even though they hurt profits of commercial lenders such as his. “On the subject of interest rates, whatever needs to be done as required by economy science should be done. You may not like it,” Bali said.

Talking about need for further monetary tightening is a touchy subject in Turkey because Erdogan has been outspoken in his opposition to higher interest rates, which he said only profit the “interest-rate lobby.” He also argues that raising them results in faster inflation — an argument that goes against the orthodox economic thinking. Some investors have called for the benchmark rate of 17.75 to be jacked up by 1000 basis points.