Turkey moves to bolster banks amid lira decline and US dispute
● Currency falls 7 per cent in one day ● Nation under ‘economic siege’
Turkey’s central bank has taken action to free up cash for banks as the country grapples with a currency crisis sparked by concerns over president Recep Tayyip Erdogan’s economic policies and a trade and diplomatic dispute with the United States.
The Turkish lira has nosedived over the past week and tumbled another 7 per cent yesterday as the central bank’s measures failed to restore investor confidence.
The uncertainty pushed down world stock markets and briefly caused a sharp drop in the currencies of other emerging economies like South Africa and India amid concerns the financial trouble could spread.
The lira hit a record low of 7.23 per US dollar late Sunday, after Mr Erdogan remained defiant in his economic policies and the stand-off against the United States – a Nato ally.
He said: “Turkey is faced with an economic siege. We are taking the necessary steps against these attacks and will continue to do so.”
Mr Erdogan has threatened to seek new alliances – a veiled hint at closer ties with Russia – and warned of drastic measures if businesses withdraw foreign currency from banks.
He also ruled out the possibility of higher interest rates as they can slow economic growth.
But independent analysts say higher rates are needed urgently to stabilise the currency and Mr Erdogan’s hard line is one of the reasons investors are worrying.
Mr Erdogan won a second term in office in June under a new system of government that gives him sweeping powers. He has used his new power to put pressure on the central bank to not raise rates.
The central bank yesterday announced a series of measures to “provide all the liquidity the banks need”, but offered no hint of a rate increase.
The moves are meant to grease the financial system, ease worries about trouble at banks and keep them providing loans to people and businesses.
In times of high uncertainty, banks tend to shy away from lending to each other. A socalled credit crunch – a lack of daily liquidity – can cause a bank to collapse.
Simon Derrick, chief currency strategist at BNY Mellon, said the central bank’s measures were unlikely to be enough.
In the absence of a decisive rate increase, he said it was “hard to look at these announcements as being anything more than temporary calming measures rather than solutions to the problems at hand”.
The lira has now dropped about 45 per cent this year.
Part of the concerns about Turkey are the same as other emerging markets.
As interest rates rise in the US, investors pull their money out of countries that had enjoyed strong economic growth, but are perceived as somewhat riskier.
Turkey’s situation is among the most precarious among emerging markets because so much of its growth was fuelled with debt in foreign currencies. 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.
So far the impact on developed economies has been relatively contained. Stocks have fallen modestly in the US and Europe since last week, but analysts do not see a big risk of financial turmoil.
A few European banks have business there that could lead to losses, but that is not expected to pose a systemic danger to the region.
Among the most important things investors are watching out for is whether Turkey, in an effort to stymie the outflow of capital from the country, puts limits on money flows.
Turkey’s finance chief Berat Albayrak said the government had no plans to seize foreign currency deposits or convert deposits to the Turkish lira.