Turkish lira banknotes sit in this arranged photograph at a currency exchange in Istanbul, Turkey. (Photographer: Kostas Tsironis/Bloomberg)

Turkey’s Market Collapse Deepens as Rules Are Eased for Banks

(Bloomberg) -- 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.

Turkey’s Market Collapse Deepens as Rules Are Eased for Banks

“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.

The lira briefly trimmed losses after the central bank statement but weakened about 6.2 percent to 6.8279 to the dollar at 5:40 p.m. in Istanbul. The yield on two-year government bonds jumped 94 basis points to 25.74 percent, the highest level since the global financial crisis in 2008, while the benchmark stock index dropped 2 percent.

As the cost of insuring Turkish debt against default over five years surged more than 100 basis points to 537 basis points, the Treasury announced it wouldn’t sell 10-year fixed-coupon debt Tuesday as scheduled and will offer only floating-rates notes.

U.S. Sanctions

The currency has lost about a quarter of its value against the dollar since the U.S. 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 U.S., 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.

For details on the central bank measures, read: Turkey Central Bank Takes Steps to Support Banks as Lira Slides

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.”

Speaking to BloombergHT television from Istanbul, 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. “When necessary, all instruments should be used. That doesn’t mean you like it or want it.”

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."

Turkey signaled a clampdown on news and social media, with officials including the public prosecutor warning that criticism may be viewed as “economic attacks” on the country.
Authorities have begun investigating people who “carry out actions threatening security” as well as news reports and social media posts that would “serve as economic attacks,” the state-run Anadolu news agency said on Monday, citing a statement by the Istanbul prosecutor’s office. It tied the news reports to “forces behind the July 15 coup attempt," referring to a 2016 failed putsch that Turkey blames on a U.S.-based Islamic cleric.

Erdogan argues that raising interest rates results in faster inflation -- an argument that goes against the orthodox economic thinking. Some investors have called for the benchmark rate of 17.75 percent to be jacked up by 1000 basis points.

“The big question is why they don’t hike properly,” said Guillaume Tresca, a
strategist at Credit Agricole in Paris.

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