Dec. 26 (Bloomberg) -- Turkish central bank Governor Erdem Basci’s attempt to buy himself time to boost the lira amid a corruption probe took a beating after a third minister resigned and urged Prime Minister Recep Tayyip Erdogan to do the same.
The lira weakened 2.2 percent to an all-time low of 2.1406 per dollar today, following a 1 percent decline yesterday after Environment and Urban Works Minister Erdogan Bayraktar stepped down. The Borsa Istanbul 100 Index retreated 2.6 percent to the lowest level in almost four months at 4:44 p.m. in Istanbul. Stocks extended the slump after Istanbul prosecutor Muammer Akkas said the government is obstructing a graft probe.
Governor Basci stepped up efforts to stem the currency’s slide after police arrested the sons of two Turkish ministers and a bank chief Dec. 17 and the Federal Reserve said the next day it will cut its $85 billion monthly bond-buying program by $10 billion. Turkey’s central bank said Dec. 24 it would sell at least $6 billion through the end of January and make it more costly for lenders to park foreign currencies in its coffers.
“Minister Bayraktar’s surprise statement has nullified Basci’s efforts,” Haluk Burumcekci, chief economist at Burgan Securities in Istanbul, said by phone yesterday. “Prime Minister Erdogan didn’t directly respond to that call for him to quit, but that may change in the following days.”
Erdogan replaced Bayraktar, along with Economy Minister Zafer Caglayan and Interior Minister Muammer Guler, after changes to 10 cabinet members were approved by President Abdullah Gul late yesterday. Among other ministers who were replaced was Egemen Bagis, the EU affairs minister who has also been implicated in the corruption investigation, according to Hurriyet newspaper on Dec. 19.
The lira, this month’s worst-performer in emerging Europe and Africa, rallied 1 percent on Dec. 24 after Basci announced the new tightening measures. The gains initially continued yesterday after the resignations of the economy and interior ministers, whose sons were arrested last week as part of the corruption investigation, before reversing. The stock index also rallied as much as 1.3 percent before retreating.
The resignations had raised optimism they would “somewhat lessen the political tensions,” Burcin Metin, head of currency trading at ING Bank AS in Istanbul, wrote in e-mailed comments.
The investigation is a “light, temporary breeze” for Turkey, Nihat Zeybekci, who replaced Caglayan as economy minister, told Bloomberg by phone yesterday.
Shares, bonds and the currency swung lower after Bayraktar, the environment minister, said in an interview with NTV television that all of his actions had Erdogan’s approval and the prime minister should also resign amid the probe. The stock index ended the day 4.2 percent lower. U.S. and European markets were closed for the Christmas holiday yesterday.
“This latest resignation shows the debate will continue,” Evren Kirikoglu, a strategist at Akbank TAS in Istanbul, said in an e-mail. “Foreign investors view this as an indication that the parties subject to the probes are not in agreement among themselves.”
In a bid to buttress the lira yesterday, the central bank sold $450 million at a currency auction. It will sell another $450 million today for a third consecutive day in what will be the biggest three-day amount sold since the sales started on June 11.
The lira depreciated 1.7 percent to 2.1306 per dollar today, extending its decline this year to more than 16 percent, the fourth-worst performance among 24 emerging-market currencies tracked by Bloomberg.
Turkish assets were further pressured this month on concern that a power struggle between the government and followers of U.S.-based Islamist cleric Fethullah Gulen, who has a wide following in the police and judiciary, will escalate. The prime minister removed hundreds of police chiefs and bureaucrats in response to the probe, which also implicates the chief executive officer of Turkiye Halk Bankasi AS.
The central bank said Dec. 24 it will sell at least $3 billion by year-end and a minimum of the same amount next month. Policy makers will also change the reserve options mechanism, or ROM, which allows lenders to hold part of their required lira reserves in foreign exchange or gold at specified conversion rates.
Basci will raise ROM rates from Jan. 1, with lenders wanting to keep more than 40 percent of reserves in the U.S. currency facing conversion rates of as high as 3.2 for the uppermost band, up from a high of 2.8 previously. This week’s measures will inject about $1 billion into the financial system, the central bank said on Dec. 24.
Increasing foreign-currency auctions “can only smooth the depreciation trend rather than reversing it,” Gokce Celik, an economist at Finansbank AS in Istanbul, said in a note e-mailed on Dec. 24. “The central bank’s reserves are not strong when compared to Turkey’s large external financing needs.”
The country, faced with a widening current-account deficit, had foreign-exchange reserves, excluding gold, of $115 billion as of Dec. 13, according to data compiled by Bloomberg, compared with $480 billion for Russia and $376 billion for Brazil.
Foreign investors sold $532 million in bonds in the week to Dec. 20, according to central bank data released today. That took the selling in the two weeks to that day to $1.9 billion.
Three-month implied volatility for the lira was little changed near a three-month high yesterday. The two-year note yield rose 17 basis points to 9.73 percent, while 10-year bond yields climbed 49 basis points to 10.58 percent, heading for the highest close since May 2010.
“In the medium term, the lira should depreciate,” leading the central bank to tighten policy further, Guillaume Tresca, a senior emerging-market strategist at Credit Agricole SA in Paris, said in e-mailed comments on Dec. 24.
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