People hold a large Turkish national flag. (Photographer: Kostas Tsironis/Bloomberg)

Lira Extends Slide as Erdogan Says Turkey in an Economic War

(Bloomberg) -- Turkey’s lira slumped for a fourth day to a new record low, with the sell-off spreading to other emerging-market currencies, after the country’s president showed no signs of backing down in a standoff with the U.S.

The lira tumbled as much as 11 percent against the dollar in thin trading in Asia, before trimming losses as the central bank moved to boost lenders’ access to lira and foreign exchange liquidity. Earlier, the Banking Regulation and Supervision Agency stepped in to limit swap transactions on the battered currency.

“Turkey’s friction with the U.S. is weighing on the lira, and is unlikely to improve anytime soon,” said Takashi Kudo, head of financial markets research at Fujitomi Co. in Tokyo. “Concerns are also growing about European financial institutions due to their exposure to Turkey. All in all, emerging-market currencies are under weakening bias from all those problems.”

Lira Extends Slide as Erdogan Says Turkey in an Economic War

The central bank measures will add about 10 billion liras ($1.5 billion), $6 billion, and $3 billion equivalent of gold liquidity to the financial system, the central bank said in a statement posted on its website.

The Turkish currency has been a casualty of a deepening crisis spurred by the administration’s growth-at-all-costs agenda and a worsening spat with the U.S., which sanctioned Turkey over the detention of an American priest. The lira’s plunge sparked tremors through global markets on Monday, dragging a gauge for emerging-market currencies to the lowest in more than a year.

The lira had dropped to as low as 7.2362 against the dollar, with some banks said to avoid providing two-way prices amid unprecedented volatility, before trading at 6.6565 at 9:06 a.m. in Istanbul. The South African rand fell to its weakest in more than two years, while the Mexican peso and the Indonesian rupiah also declined.

Economic War

The sell-off also represents a vote of no-confidence in a new system of government that earlier this year handed President Recep Tayyip Erdogan unrivaled authority, essentially paralyzing the bureaucracy in Ankara.

In speeches Sunday, Erdogan remained defiant, vowing never to give in on interest-rate hikes while saying the country is in an “economic war.” He also ruled out an agreement with the International Monetary Fund.

“The decline in the lira is multifaceted, caused not only by a weak external position in terms of current account deficit and inadequate currency reserves, but also the challenging political environment which exacerbates the vulnerabilities in the lira,” said Kerry Craig, global market strategist at J.P. Morgan Asset Management.

The extended rout in the lira also weighed on the euro and the Australian dollar, while spurring haven demand. The euro fell 0.3 percent against the greenback, while the yen strengthened against every Group-of-10 peer and Treasuries were bought.

“The euro is especially vulnerable given its exposure to the Turkish economy, and I’d expect to see further haven flows to the yen and dollar,” said Nick Twidale, chief operating officer at Rakuten Securities Australia Pty.

Runaway Inflation

Years of a growth-at-all-costs policy bias have left Turkey’s companies saddled with hundreds of billions of dollars in foreign debt, runaway inflation and one of the world’s largest current-account deficits.

“There’s nothing as yet to suggest that the government, or Turkish central bank, is poised to announce the fiscal or monetary policy measures capable of quickly restoring confidence in Turkey,” said Ray Attrill, head of foreign exchange strategy at National Australia Bank Ltd. in Sydney.

Turkey’s central bank -- which has raised its main policy rate to 17.75 percent -- unexpectedly refrained from a further hike at its last meeting.

While investors are pleading for dramatic central bank action to bolster the lira, Turkish officials fear that even a huge increase in borrowing costs could be quickly offset by another round of U.S. sanctions, according to two people familiar with the thinking of the country’s economic administration.

Dangers Ahead

A Turkish acknowledgment of the dangers ahead is nevertheless needed to soothe markets and even if the central bank provides only a stop-gap solution, it should still be done, according to Refet Gurkaynak, a professor of economics at Bilkent University in Ankara.

“It will signal that they are not looking at off-market solutions such as capital controls, conversion of FX deposits" and other unorthodox policies, he said. “To work, it will have to be large and would have to be accompanied by a ‘whatever it takes’ statement."

Turkey’s government debt plummeted on Friday, driving the yield on 10-year debt to a record close of 22.11 percent. Five-year credit-default swaps -- the cost to insure the bonds against default -- climbed 75 basis points to 453 basis points Friday evening in New York, the highest level since March 2009, CMA data showed.

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