Lira pares losses, but meltdown still rattles markets

TURKEY’S lira pulled back from a record low of 7.24 to the dollar yesterday after the central bank pledged to provide liquidity and cut reserve requirements for Turkish banks, but its meltdown continued to rattle global markets.

The currency has lost more than 40 percent against the dollar this year, largely over worries about President Tayyip Erdogan’s influence over the economy, his repeated calls for lower interest rates, and worsening ties with the US.

On Friday that relentless slide turned into a crash: the lira dropped as much as 18 percent, hitting US and European stocks as investors took fright over banks’ exposure to Turkey.

The fresh lira collapse on Sunday night hit Asian shares, weakened the South African rand and drove demand in global markets for safe currencies including the dollar, Swiss franc and yen. Shares in Europe’s major banks also lost ground.

The central bank, which surprised markets last month when it left interest rates unchanged despite double-digit inflation and the tumbling lira, announced the moves on liquidity and reserves after Finance Minister Berat Albayrak said authorities would start implementing an economic action plan yesterday.

The bank cut the lira reserve requirement ratio, a cash buffer held by banks, by 250 basis points for all maturity brackets and lowered reserve requirement ratios for non-core foreign exchange liabilities by 400 bps for maturities up to three years.

The moves would free up 10 billion lira, $6bn, and $3bn equivalent of gold liquidity in the financial system, the bank said. It also pledged to provide “all the liquidity banks need”.

While the measures should ease worries over financial stability, they will have no direct impact on the lira because they do not affect banks’ for- eign exchange positions, BNP Paribas strategist Erkin Isik said in a note.

Isik said the lira’s current levels would add between 4 and 5 percentage points to headline inflation in coming months, pushing it up to around 21 percent in September from nearly 16 percent last month.

On Sunday night Turkey’s banking watchdog BBDK said it was limiting banks’ foreign exchange swop transactions. Record low The lira, which hit a record low of 7.24 against the dollar in Asian trading, pared losses after Albayrak’s comments and the central bank an- nouncement, strengthening briefly to 6.4. It was last trading at 6.89 per dollar.

Turkish bank shares and their dollar bonds tumbled, and Turkey’s sovereign dollar debt fell.

Albayrak said in an interview published late on Sunday that Turkey will start implementing an economic plan to ease investor concerns. “From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market,” he said, without giving details.

BlueBay Asset Management strategist Timothy Ash said the plan should have been ready before Asian markets opened. – Reuters