Turkish Markets Slide as Agbal’s Exit Stokes Lira Turmoil
A selection of Turkish Lira banknotes sit in this arranged photograph in London, U.K. (Photographer: Jason Alden/Bloomberg)

Turkish Markets Slide as Agbal’s Exit Stokes Lira Turmoil

Turkey’s stocks, bonds and the lira tumbled as the shock dismissal of the central bank chief triggered concern the country is headed for a fresh bout of currency turbulence.

In one of the sharpest selloffs in years, the Borsa Istanbul Index lost more than 9%, triggering circuit breakers that halted trading. The lira also weakened more than 9%, while yields on Turkish local and dollar bonds soared.

Investors also sold shares of European banks with ties to Turkey. Spain’s Banco Bilbao Vizcaya Argentaria SA, which owns about half of lender Garanti, sank over 7%.

The turmoil underscores concern that President Recep Tayyip Erdogan’s removal of Naci Agbal after just four months as governor marks an end to a period of policy orthodoxy that had briefly restored the lira’s fortunes after a 20% retreat last year. Agbal’s successor, Sahap Kavcioglu, a columnist and university professor, has been a critic of the recent interest-rate increases enacted under Agbal’s stewardship, including last week’s larger-than-expected hike.

“The replacement of the CBRT governor is a major blow to investor confidence in Turkey,” wrote Adam Cole, chief currency strategist at RBC Capital Markets. “Not surprisingly, geographical proximity leaves Europe most exposed.”

Turkish Markets Slide as Agbal’s Exit Stokes Lira Turmoil

BBVA $60 Billion Turkish Assets a Focus; ING, BNP Exposure Small

The lira’s decline puts it within a few percentage points of a record low reached on Nov. 6, the day before Agbal was appointed. It was trading at 7.919 to the dollar at 10:45 a.m. in New York after weakening to 8.4707 in early Asian hours, when liquidity for emerging-market currencies tends to be thinner.

The rush to sell the currency as markets reopened Monday overwhelmed support for the lira from state banks, according to a foreign-currency trader familiar with the transactions who isn’t authorized to speak publicly and asked not to be identified.

Erdogan’s decision to fire Agbal, who had sought to restore the central bank’s credibility, has sparked speculation that the country will once again start easing interest rates. Before Agbal, investors frequently criticized Turkey’s monetary authority as being too quick to undo tightening and too slow to respond to risks, most recently in August 2018, when the lira lost about a quarter of its value.

The dismissal “has ignited policy uncertainty and points to institutional challenges, adding risks to financial conditions,” wrote Moody’s Investors Service analysts including Madhavi Bokil and Dima Cvetkova in a note.

Turkish Markets Slide as Agbal’s Exit Stokes Lira Turmoil

Some 875 basis points of interest-rate increases since November, including Thursday’s 200 basis-point increase, had helped made the lira the best carry-trade currency this year, bringing foreign capital back into Turkish markets.

A “haze of volatility” has returned to Turkish markets, Stephen Innes, chief global market strategist at Axicorp Financial Services Pty Ltd. in Sydney, wrote in a note. “The market had been warming up to a more normalized monetary policy since November. This move is a big blow to these hopes.”

Treasury and Finance Minister Lutfi Elvan said Monday that Turkey will continue to stick to free markets and a liberal foreign-exchange regime. The government will prioritize price stability, and fiscal policies will support the monetary authority in its efforts to rein in inflation, he said.

“Markets can take some encouragement from recommitment to no capital controls and fact that state banks and presumably central bank have been selling dollars and have got the lira back below 8,” said Timothy Ash, a strategist at BlueBay Asset Management in London. “I expect massive state bank intervention in the short term to hold a line on the lira.”

Market Snapshot

  • The Borsa Istanbul Banks Index, in which foreigners have a larger presence, fell 9.9%.
  • The yield on Turkey’s benchmark 10-year local-currency bond rose 483 basis points to 18.89% at close.
  • The 10-year benchmark dollar bond yield increased 138 basis points to 7.344%.
  • Turkey’s five-year credit-default swaps jumped the most on record, to 455 basis points.
  • Three-month options volatility on the lira reached 34%.
Turkish Markets Slide as Agbal’s Exit Stokes Lira Turmoil

Kavcioglu pledged on Sunday to use monetary-policy tools effectively to deliver permanent price stability. He also said the bank’s rate-setting meetings will take place according to schedule.

Kavcioglu is a professor of banking at Marmara University in Istanbul and a columnist at the pro-government Yeni Safak newspaper. The paper criticized the monetary authority’s latest interest-rate increase on its front page on Friday, saying the decision “turned a deaf ear” to Turkey’s 83 million people, would hurt economic growth and primarily benefits “London-based owners of hot money.”

In a column published by Yeni Safak on Feb. 9, Kavcioglu said it was “saddening” to see columnists, bankers and business organizations in Turkey seeking economic stability in high interest rates at a time when other countries had negative rates. He also seconded Erdogan’s unorthodox theory on the relationship between interest rates and inflation, saying that raising interest rates would “indirectly open the way to increasing inflation.”

Most economists think the opposite is true.

Hold the Line

Last year, Turkish banks spent more than $100 billion of the nation’s foreign reserves to support the currency, according to a report by Goldman Sachs Group Inc. That prompted calls by Turkish opposition lawmakers for a judicial probe into the official reserves.

In comparison, foreign investors purchased a net $4.7 billion worth of stocks and bonds in the months following Agbal’s appointment. Overseas inflows to Turkey through swaps totaled about $14 billion during that period, Istanbul-based economist Haluk Burumcekci said.

What Bloomberg Economics Says

“The hit to the central bank’s credibility and independence can’t be overstated. Erdogan has battered the institution with interventions that have repeatedly backfired. Financial markets were willing to give Agbal a chance, his successor will find it hard to build that trust again.”

--Ziad Daoud, chief emerging markets economist. For full REACT, click here

The lira’s weakness could add to inflationary pressures building in the economy and erode Turkey’s real rate, currently the highest in emerging markets after Egypt’s.

“Right now, the bigger question is whether we can avoid a liquidity shock/credit event and whether it makes sense to sell into a market that’s already pricing in quite a bit of risk,” said Ed Al-Hussainy, a senior interest rate and currency analyst at Columbia Threadneedle Investments in New York.

Japanese Positions

While Turkey’s high nominal rates are a lure for yield hunters, its mercurial inflation and the perception that central-bank policy has been too loose has made the lira one of the most volatile currencies in the world.

Among those who find themselves on the wrong side of the trade are Japanese retail investors. Long positions made up almost 86% of the total lira-yen positions traded on the Tokyo Financial Exchange on Friday, the most among 14 major currency pairs, based on the latest data compiled by Bloomberg.

“We will never know how successful Agbal’s approach could have been, but initial signs were positive,” said Emre Akcakmak, a portfolio adviser at East Capital in Dubai, who anticipates a reversal on some of the recent hot money inflows.

“Even when the market stabilizes after a while, investors will have little tolerance, if any, in case the new governor prematurely cuts the rates again,” Akcakmak said.

©2021 Bloomberg L.P.

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