Basci Burning $15 Billion Fails to Halt Lira Drop: Turkey Credit

Photographer: Kerem Uzel/Bloomberg

The lira fell 2.5 percent last week as it came under pressure from the corruption probe and the Federal Reserve’s Dec. 18 announcement that it would reduce its monthly bond purchases by $10 billion. Close

The lira fell 2.5 percent last week as it came under pressure from the corruption probe... Read More

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Photographer: Kerem Uzel/Bloomberg

The lira fell 2.5 percent last week as it came under pressure from the corruption probe and the Federal Reserve’s Dec. 18 announcement that it would reduce its monthly bond purchases by $10 billion.

It took Turkish politicians five days to undo what central bank Governor Erdem Basci spent almost $15 billion trying to achieve: lira stability.

Trader expectations for future price swings in the currency posted the biggest weekly jump since August in the period ended Dec. 20. Implied volatility in the lira was 11.6 percent yesterday, the highest after South Africa’s rand among peers in emerging Europe and Africa.

The Turkish currency slumped to a record 2.0992 against the dollar today as a graft probe implicating four ministers and the chief executive officer of Turkiye Halk Bankasi AS shook investor confidence. The central bank sold $400 million in foreign exchange that day and said it may boost the size of daily auctions as much as tenfold. It will sell at least $3 billion by the end of the month and a minimum of $3 billion in January, Basci said at a conference in Ankara today.

“Raising the fight against lira depreciation via foreign-exchange intervention is more likely to be a red flag to speculators than calm,” Christian Lawrence, a currency strategist at Rabobank International in London, wrote in e-mailed comments yesterday. “The central bank doesn’t have enough reserves to really fight the market.”

Turkey’s foreign-exchange reserves stood at $115 billion as of Dec. 13, according to data compiled by Bloomberg. This compares with $480 billion for Russia, $375 billion for Brazil and $176 billion for Mexico. Daily currency auctions in Turkey started on June 11.

Corruption Probe

The lira fell 2.5 percent last week as it came under pressure from the corruption probe and the Federal Reserve’s Dec. 18 announcement that it would reduce its monthly bond purchases by $10 billion. It strengthened today as Basci pledged to increase currency sales.

Prime Minister Recep Tayyip Erdogan, embattled by a corruption probe that has prompted investors to sell Turkish assets, vowed to purge his administration of groups he said are plotting against the government. The chief executive officer of Halkbank was arrested under the investigation embroiling the sons of three ministers.

Markets have plunged on concern the arrests are part of an escalating power struggle between the government and followers of U.S.-based Islamist cleric Fethullah Gulen, a former Erdogan ally who has a wide following in the police and judiciary.

Lira Outlook

“Political risks in Turkey have risen after the corruption-related arrests,” Ilan Solot, a strategist at Brown Brothers Harriman & Co. in London, said in e-mailed comments yesterday. With “fundamentals remaining poor, the lira now looks set to underperform again after outperforming within emerging markets recently,” he said.

The lira’s depreciation last week was the biggest among 24 emerging markets. The two-year note yield fell eight basis points, or 0.08 percentage points, to 9.68 percent today and the currency advanced 0.8 percent to 2.0805 at 3:30 p.m. in Istanbul, the most among 24 emerging market currencies tracked by Bloomberg.

Reducing currency volatility will be “very difficult” against the backdrop of Fed tapering unless the Turkish central bank tightens policy, Murat Toprak, head of European, Middle East and African currency strategy at HSBC Bank Plc in London, said in e-mailed comments yesterday.

At the central bank’s monthly policy meeting last week, Basci maintained the one-week repurchase rate at 4.5 percent and held the upper and lower bands of his rates corridor at 7.75 percent and 3.5 percent, respectively. The governor will speak in Ankara today on monetary policy.

“A way to decrease foreign-exchange volatility is to restore the risk premium by hiking interest rates,” Toprak said. The “higher cost of carry would discourage short lira positions and consequently reduce the volatility,” he said.

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Riad Hamade at rhamade@bloomberg.net

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