How serious is Turkey's lira crisis and what are the implications?

Jermaine Castillo
August 14, 2018

Asked if the current crush of the Turkish Lira could be compared to the early 1990s recession of emerging European countries, she said: "I think central banks and emerging markets have gotten much smarter at using the tools at their disposal to really complement what the government is doing".

Turkey has found itself in the firing line for a number of reasons, including concerns over President Recep Tayyip Erdogan's growing influence over the country's central bank and his recent diplomatic spat with the United States, which has just increased tariffs on Turkish steel and aluminium.

On Friday that relentless slide turned into a crash: the lira dropped as much as 18 per cent, hitting U.S. and European stocks as investors took fright over banks' exposure to Turkey.

Asian sharemarkets were a sea of red on Monday as the concerns that Turkey's currency rout will spread to other emerging markets sent investors fleeing from stockmarkets in the Asian region, which are broadly regarded as fitting into the emerging markets space. Shares in Europe's major banks also lost ground.

The central bank was ready to provide lira liquidity to banks if needed at an overnight rate of 19.25 pct - 150 basis points higher than the weekly repo rate - bankers told Reuters after the bank did not hold its regular repo auction on Monday.

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Early last month, he claimed the exclusive power to appoint the bankers that set interest rates - and to cement his control he has put his son-in-law in charge of economic policy.

The moves are meant to grease the financial system, ease worries about trouble at banks and keep them providing loans to people and businesses. It also pledged to provide "all the liquidity banks need". He said the country's banks and banking regulator "will take the necessary measures quickly". Not only would this help contain inflation but it would also help support the lira. "Constrained monetary policymaking, check", says foreign exchange analyst Alvin Tan with Société Générale on London. It pared losses after Mr Albayrak's comments and was trading at 6.73 to the dollar at 0433 GMT. Stocks dropped 4 per cent, with the BIST index of blue-chip stocks down around 50 per cent in dollar terms this year.

Finance Minister Berat Albayrak announced late Sunday that Ankara would begin implementing an action plan in response to the crisis.

Except that the fall in the Turkish lira, which earlier on Monday fell by a further 11% against the U.S. dollar to take its fall this year to more than 40%, has focused the minds of investors on what other economies may have similar characteristics, such as high levels of corruption and an unwillingness to tackle it among the political elite, or a high current account deficit and excessive reliance on overseas investors.

"It's purely technical and Turkey needs a complete rebalancing of its economic business plan, and very sharp rate hikes and a strong commitment that the central bank will be independent", Credit Agricole's senior emerging markets strategist Guillaume Tresca said.

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Countries that, like Turkey, have large amounts of debt denominated in foreign currencies are especially in the firing line.

In the interview with Hurriyet newspaper, Mr Albayrak described the lira's weakness as "an attack", echoing Mr Erdogan - who is his father-in-law.

But there are fears that Mr Erdogan, who is famously averse to interest rate rises, may be pressuring the central bank not to act.

Hitting out at the US, Turkish President Recep Tayyip Erdogan said: "You act on one side as a strategic partner but on the other you fire bullets into the foot of your strategic partner".

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