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Basci Eases Funding Squeeze as Turkish Banks Juggle Changes

Turkey’s central bank provided banks more liquidity and cheaper funding, a day after scrapping any low-cost lending, as Governor Erdem Basci tweaks policy on a day-by-day basis to curb inflation and support the lira.

Basci, who has surprised markets with unorthodox policies since he was appointed in April, today offered banks 8 billion ($4.6 billion) liras in one-week repo funding at the benchmark rate of 5.75 percent. Yesterday he withheld funding at that rate, forcing lenders to pay as much as 12.5 percent through an overnight facility. Today he also released an additional 11 billion liras in liquidity by cutting the level of reserves banks must hold against their liabilities.

Basci said yesterday that his new policy gives flexibility enjoyed by “no other bank in the world,” allowing him to strengthen a currency that has slumped this year while retaining the option of cheaper money if Europe’s debt crisis drags down Turkey’s economy. Critics say there is a lack of clarity over Basci’s intentions that may rebound on the bank.

The bank’s policy means that “daily, even hourly, changing market conditions will be the case for the coming weeks,” Galip Tozge, executive vice president for consumer banking at Istanbul-based lender Akbank TAS, said in e-mailed answers to questions. “All the banks need to monitor pricing policies of loans and deposits very closely for the coming days.”

The central bank has kept the benchmark at a record low since the start of August, citing the risk of a slump in Europe, Turkey’s main export market.

Bond Yields

Yields on government bonds fell today, dropping 5 basis points, or 0.05 percentage points, to 9.90 percent. Yields had jumped 33 basis points yesterday as Basci pushed up costs.

The shifting burden on banks is roiling share prices. Akbank, part-owned by Citigroup Inc., and Yapi & Kredi AS slumped more than 4 percent yesterday. Akbank added 2.8 percent and Yapi Kredi gained 4.6 percent today. The index of Turkish bank shares fell 3.5 percent to a two-month low yesterday, and recovered 3.3 percent at the 5:30 p.m. close today, outpacing the main ISE National 100 index, which added 2.2 percent as the euro region’s leaders agreed on a plan to stem the debt crisis.

The new policy “introduces significant uncertainty and volatility” and “is negative for the stock market overall and may hurt the bank sector in particular,” JPMorgan analysts including David Aserkoff said in an e-mailed report today.

The lira has gained more than 6 percent since Basci on Oct. 20 announced he was tightening, paring a slump of 17 percent in the first nine months of this year that fueled inflation.

Surprise to Markets

Basci, 45, surprised markets Aug. 4 by cutting the benchmark rate by half a point. He has also adjusted reserve requirements on banks’ dollar and lira liabilities to limit credit growth while protecting the currency.

Today he added to those adjustments, lowering lira reserve requirements to release 11 billion liras in liquidity and allowing banks to hold a larger proportion of their reserves in foreign currency.

The additional liquidity doesn’t contradict pledges to tighten because “the banking system is massively short in lira and despite the fact that the reserve cut will provide more liquidity, the overall shortage will remain large,” Tevfik Aksoy, chief economist for the region at Morgan Stanley & Co. in London, said by e-mail. The bank “will be able to fine-tune the amount of liquidity it injects into the system on a daily basis and set the course.”

The shifts haven’t prevented a pickup in inflation. It’s currently 6.2 percent and Basci predicted yesterday that the year-end rate will be 8.3 percent. And they didn’t help reduce a trade deficit that expanded to a record $10.4 billion in September, according to figures announced today.

Above Target

Inflation of 8.3 percent would be far enough above the bank’s 5.5 percent target to force Basci to write a letter to the government explaining the failure to meet it. He may cite tax increases this week that pushed tobacco, alcohol and mobile-phone prices higher, as well as the lira’s decline and economic growth that was faster than the bank forecast.

The new central-bank policy may curb growth in bank lending, running at an annual rate of almost 40 percent, and economic output by pushing borrowing costs higher throughout the economy. It will mean “higher effective interest rates,” Deputy Governor Turalay Kenc said yesterday. The overnight repo rate between banks increased to 11.1 percent from an average of 10.9 percent the previous day.

Tim Ash, an economist in London at Royal Bank of Scotland Plc, argues that Turkey’s priority should be to cool its economy rather than shore it up against the risk from Europe. He says Basci’s efforts to keep both options open may deter investors.

The latest policy is “open still to criticism that it is using smoke and mirrors to prioritize growth over the fight against inflation,” Ash said in an e-mailed note. “The problem for the central bank of Turkey is the perception that it is simply trying to be too clever.”

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