Turkish lira crashes amid EU contagion worries
The Turkish lira sank to record new depths as European traders got to work on Friday as concerns mounted about US economic sanctions and amid questions of how much the eurozone economy would be affected.
The lira crashed 7.3% against the dollar on Friday morning to 5.9568 and touching 6.3 at one point, having been at 5 at the start of August. The lira was also down more than 5% against the euro to 6.7355.
The descent was accelerated as a Turkish government delegation returned from talks in Washington with no apparent solutions to the crisis, added to fresh reports in the Financial Times that the European Central Bank is worried about the exposure of major eurozone banks to Turkey. Spain's BBVA, Italy's Unicredit, France's BNP Paribas are particularly exposed by the currency slump, the newspaper said, which sent the euro to fresh lows.
Local assets started sinking last week when Washington imposed sanctions over Turkey's refusal to free a detained American pastor, Andrew Brunson, who has been held on espionage charges.
In recent months the economy has seen a surge in inflation, bond yields and a yawning current account deficit, amid direct pressure from President Recip Tayyib Erdogan on Turkey's central bank to keep interest rates low.
Investor confidence has crumbled, with the lira stumbling overnight on speculation that Ankara might be forced into an emergency rate hike before the weekend.
Turkey’s finance minister, Berat Albayrak, is also expected to unveil the country's “new economic model” around 12:30 BST on Friday.
SPIRALLING OUT OF CONTROL?
Strategists at TD Securities said the intraday spike of USDTRY in excess of 14% was "a brutal reminder that things are slipping out of control" and that "fast action" was required from the central bank, the CBRT, with one-year rates already at over 24%, "but the rates market is broken and levels aren't accurate".
"Turkey is in deep trouble," said economist Carsten Hesse at Berenberg, with the country's credit-driven boom followed by the surge in inflation, yields, current account deficit and now the dramatic plunge in Turkey’s exchange rate, which all "suggest that the country could now be in danger of heading for a bust".
Beyond the obvious risks to Turkey itself, Hesse did not think there was much risk to the Eurozone economy, though. "In our view, the impact on Eurozone GDP growth would be small. Even if Eurozone goods exports to Turkey were to fall by, say, 20%, this would subtract no more than 0.1ppt from growth in the big Eurozone."
With Turkey seeming to have been on the brink of a crisis several times this decade, only for the CBRT to do just enough in 2011, 2014 and 2016 to steady the ship, William Jackson, chief emerging markets economist at Capital Economics, said there are reasons to think that any emergency interest rate hikes during the current currency crisis "might only provide fleeting relief", with Albayrak’s unveiling later on Friday likely to be a "damp squib".
One of these reasons was that President Erdogan’s strengthened powers under the new presidential system he took on last month, "have made it increasingly uncertain whether policymakers will be able to act to stabilise the economy. The central bank has been conspicuously quiet during the sell-off, raising fears that it isn’t being permitted to raise interest rates. This is exacerbating the fall in the currency."
Jackson also said worries about the health of the Turkish banking sector, which has previously managed to stay out of the spotlight, "are justified", with borrowing costs having risen by much more than those of the government.
He predicted the central bank will "probably raise interest rates over the next week or two".
Said TD Securities: "In the short-term, the market will also be looking at whether the CBRT steps in with aggressive measures (i.e. tightening) to stabilize the market. The market will also be interested to have more details about finance minister Albayrak's 'new economic model' that will be unveiled at around 12:30 London time.
"Meanwhile, Erdogan is scheduled to speak at 12:00, and that could be the first opening sign that rate hikes are coming, or perhaps the opposite. As far as we are concerned, we think the CBRT will have to hike the repo rate to around 30%, with a first move of at least 300bps (even more in light of today's TRY moves) to be announced in the coming hours or days. This would likely push the very front-end of the curve higher, but help the lira to stabilize."