Turkey’s Central Bank to Support Embattled Lira

Marco Green
August 14, 2018

In midday trading in Europe, London's 100-share index was down 0.6 percent, while the German and French share markets were down by 0.3 percent and 0.7 percent.

Here is a look at some of the reasons behind the plunge and how it might affect the rest of the world. "For now, however, the European Central Bank looks unlikely to change its forward guidance on net asset purchases (winding down in Q4 this year) or interest rates (on hold through the summer of 2019) in response to Turkey's crisis".

Such sell-offs are not uncommon during the summer - there was one this time last year prompted by concerns over North Korea - but investors are, nonetheless, very alert to the fact that most stock markets in western countries are now in their tenth year of the current bull run that began in March 2009.

"On the subject of interest rates, whatever needs to be done as required by economy science should be done".

That draws capital away from Turkey, weakening the currency. Inflation hit 15.9 percent annually in June.

That makes the currency drop so much more painful as it will increase the cost of servicing debt for Turkish companies and banks and could lead to bankruptcies.

Economists have warned that such statements by Erdogan could prolong the crisis, along with his refusal to raise interest rates, in line with his claim that low interest rates cause low inflation - a view at odds with mainstream economic analysis.

The central bank has over the last few weeks defied calls from markets for rate hikes to combat these problems, raising fears of interference from Erdogan who has repeatedly called for low interest rates.

Although the lira rose slightly after the central bank's move to support the economy, it still hit a new record low against the dollar.

"Some close the doors and some others open new ones", added Erdogan, who has built closer ties over the last years with countries from Latin America, Africa to Asia. The lack of interest-rate action has coincided with a marked worsening of Turkey's relations with the US.

"They discussed Turkey's continued detention of Pastor Andrew Brunson and the state of the US-Turkey relationship", Sarah Huckabee Sanders, the White House press secretary, said in a statement.

The crash on Turkey's "Black Friday" of August 10 - when the lira fell by some 16 percent - was precipitated by a tweet from US President Donald Trump doubling aluminium and steel tariffs on Turkey.

Trump's decision to double United States tariffs on Turkish steel and aluminium has only exacerbated the situation. The lira shed another 8% to below 7 per dollar after a double-digit percentage slide Friday.

Another factor to bear in mind, though, is that - as with the pound - some of these currency falls may appear more intense because of the U.S. dollar's current strength.

The Trump administration has imposed sanctions against several countries in recent months, including Turkey, Iran and Russian Federation. In presentation slides for those results, UniCredit said Yapi Kredi accounted for 2 percent of group revenues and a 10 percent drop in the lira would cut 2 basis points off its core capital ratio.

Tom Kinmonth, senior fixed income strategist at ABN Amro Bank, has calculated that European bank exposure is limited in Turkey. BBVA is the most exposed, followed by UCG, ING, BNPP and HSBC, whose share price was down 0.8 per cent in afternoon trading.

The Turkish strongman also pointed out that Turkey was considering other markets and political alternatives to its "strategic partnership" with Washington.

But analysts argue that the malaise of Turkey - a high-growth economy with widely-acknowledged potential and importance - goes far deeper to policy and imbalances that have been allowed to persist for too long. Erdogan himself was elected prime minister in 2003 on the back of a major crisis two years earlier, but has traditionally always had Washington's staunch support. So far he's shown no sign of doing either.

Other reports by Click Lancashire

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