‘They Need A Volcker Moment’: Lira Collapse Resumes, Foreign Investors Dump Most Turkish Bonds Since U.S. Election

I mean, look: exactly no one thought CBT’s emergency LLW hike, rolled out on Wednesday amid yet another harrowing plunge in the lira which fell to fresh all-time lows after Mrs. Watanabe got stopped out in TRYJPY overnight, was going to be enough to arrest the slide.

This is a story about central bank credibility in the face of an overbearing executive, hell bent on commandeering monetary policy in the service of perpetuating a war with interest rates which, according to noted FX guru, scourge-o’-Kurds and Sméagol stunt double, Recep Tayyip Erdogan., are the “mother and father of all evil“.

As BlueBay Asset Management’s Timothy Ash put it, the central bank’s credibility is “shot to hell”.

Given all of that, 300bps on the LLW was destined to be just as ineffective as 75bps proved to be on April 25.

Well sure enough, the lira is down some 4% on Thursday and folks are talking about capital controls again.


Panning out, you can see just how ineffective the last effort was and how quickly Wednesday’s half-hearted hike (which, you’ll recall, was pitched as “very powerful tightening”) was forgotten:


As you can see, the market is fading that pretty aggressively and the reason is clear. A bit of conciliatory rhetoric out late Wednesday notwithstanding, Erdogan is almost sure to reiterate his message about rates and nefarious foreigners in his election push which, as it happens, starts today.

“The next catalyst comes from Erdogan himself, as he kicks off his re-election campaign today,” Bloomberg’s Stephen Kirkland noted this morning, adding that “key to stabilizing the lira will be his tone and whether he sticks to yesterday’s script.”

Right. And Erdogan is not a guy who is predisposed to caving when it comes to what he perceives to be “external” pressure.

Meanwhile, Deputy PM Simsek and central-bank-Governor-for-about-another-four-weeks Murat Cetinkaya are all set to have a pow wow with money managers in London next week. Apparently, they’re going to chat with Turkish finance and business leaders in Istanbul ahead of time, presumably to figure out what the fuck to say.

CBT needs to “find its Volcker moment”, Bloomberg economist Ziad Daoud suggests.

That’s not likely to be in the cards for reasons of the Erdogan-kind and foreign investors apparently know it, which is why they yanked nearly $640 billion from Turkish bonds last week, the worst outflow since the U.S. election. The total outflow from stocks and bonds by foreigners was $710 million. That takes the YTD flows into Turkish assets into negative territory.

As Barclays reminds you, foreign ownership isn’t necessarily “excessive” (to quote the bank), which is a good thing in the context of everything said above. Here’s what they said in a note out earlier this week:

Foreign holdings of Turkey’s local bond and equity markets could amplify FX demand if such positions were to be cut significantly. So far, foreign investors have not reduced their exposure to Turkish equities or bonds in a meaningful way. According to CBT data, cumulative non-resident flows into local bonds (TURKGBs) since end-2017 is USD1.5bn. This inflow was partly driven by the trimming of some underweight positions, in our view. Even after this adjustment, foreign ownership of local bonds at 19% (or USD26bn) remains below its historical highs of 24-25%. Meanwhile, the equity market has had about USD1bn of non-resident outflows year-to-date, leaving foreign ownership at c.64% (or USD45bn), in line with its 10-year average.


You can draw your own conclusions here, but I guess what I would say is that it’s hard to see how this situation is going to improve materially in the absence of Erdogan himself coming out and saying something definitive about central bank independence and the necessity of hiking rates as much as necessary to combat the run on the currency.

Don’t hold your breath.


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