Turkey Get Respite on Liquidity Moves, Tight Policy Calls

(Bloomberg) -- Turkish policy makers’ steps to support the financial system helped bolster investor confidence and gave the nation’s markets a much-needed breather on Tuesday.

Turkish banking shares rose as much as 5.3 percent, snapping a three-day losing streak that wiped out almost 17 percent of their market value. The lira also jumped 5 percent, paring its losses over the past month to 26 percent, while the yield on 10-year government bond fell by the most on record.

The move reflected a measure of confidence that the steps taken by the central bank on Monday to support the banking system may help restore stability. However, President Recep Tayyip Erdogan, speaking again on Tuesday, still didn’t signal any willingness to change the policies that triggered the turmoil.

On Monday, the central bank lowered the amount of money commercial lenders must keep on reserve at the regulator. It also eased rules that govern how they manage their lira and foreign-currency liquidity, while the banking regulator limited swaps transactions to make shorting the currency more difficult.

Bankers Relieved

Ali Fuat Erbil, chief executive officer of Turkiye Garanti Bankasi AS, praised the steps in an interview with NTV television on Tuesday. Turkey appeared to be approaching a “normalization period,” but that doesn’t mean the “fire is out," he said.

Erbil’s comments echoed those by Turkiye Is Bankasi CEO Adnan Bali, who said the steps were “the right moves in the right direction” in an interview on BloombergHT television a day earlier. On Tuesday, Denizbank CEO Hakan Ates said the central bank had averted a “speculative attack" and that banks were ready for an organized stress test if needed.

There were also signs on Tuesday that business leaders were beginning to rally together to try to bring Turkey’s market crisis to an end and put pressure on the government to act.

An unusual joint declaration by business association Tusiad and the Turkish Chamber of Commerce laid out a roadmap that included tighter monetary and fiscal policy, a framework for relations with the European Union, an end to Turkey’s damaging political spat with the U.S. and a long-term plan to end inflation.

“We could have a very sharp U-turn in the markets if all of a sudden Erdogan decides to give way politically in this crisis,” Hans Humes, chairman and chief executive at Greylock Capital Management, which specializes in distressed debt investing, said on Bloomberg Television. “Our expectation is that there will be a pretty sharp bounce in prices when this crisis subsides.”

The yield on 10-year local currency debt fell as much as 149 basis points on Tuesday, the most since the country issued debt of that maturity in 2010. By 4 p.m. in Istanbul the benchmark 10-year bond was yielding 21.37 percent.

Pledges by Treasury and Finance Minister Berat Albayrak on Sunday and by President Recep Tayyip Erdogan on Monday have also reassured investors that extreme measures such as capital controls weren’t on the table. Turkey would never seize deposits or forcibly convert foreign currency, Albayrak said in a statement published by Hurriyet newspaper. Erdogan later said that Turkey was committed to a free-market economy.

Liras, ETFs

As of Tuesday, signs of consumer alarm or mass withdrawals of foreign currency from banks had abated. Denizbank CEO Ates said customers had started to buy lira again. Retail accounts sold an estimated $750 million of foreign exchange on Tuesday, according to an Istanbul-based currency trader who asked not to be named as he was not authorized to speak to the media.

“The central bank’s moves should help with the liquidity needs of banks in both lira and FX during these volatile times,” said Cagdas Dogan, a banking analyst with BGC Partners in Istanbul, who said they’d be useful in the short term before “a much-needed stabilization in the markets.”

The central bank didn’t offer commercial lenders any cash through its one-week repo liquidity window for a second day, a move that some said may restrict them to borrowing from a more expensive overnight facility at 19.25 percent. The current repo rate is 17.75 percent. The central bank’s action is a “definite signal” that the central bank is tightening monetary policy, said Erkin Isik, a strategist at Turk Ekonomi Bankasi AS.

That’s not going to be enough, according to Henrik Gullberg, a strategist at Nomura Plc in London. The central bank needs to show it is serious about driving inflation lower by driving real rates “excessively high” before investors become more constructive on the lira with any conviction, he said. And as long as tensions with the U.S. remain high, the risk of further sanctions “will be there.”

©2018 Bloomberg L.P.