“Any sign of any emergency program or package for markets opening tomorrow?”, asked an incredulous Timothy Ash (from Bluebay Asset Management) on Sunday, as the clock ticks down on Turkey’s currency crisis.
Following the lira’s collapse on Friday, reports suggested Turkish banks were struggling to keep up with demand for foreign currency, a sure sign that locals did not heed Recep Tayyip Erdogan’s desperate call for citizens to trade in their dollars, euros and gold for lira.
On Saturday, Erdogan remained defiant, lambasting the Trump administration in a characteristically absurd speech that found the Turkish autocrat castigating Washington for “trading a NATO ally for a priest”, a reference to detained Christian pastor Andrew Brunson.
On Sunday, shares in Gulf banks with exposure to Turkey careened lower on fears that Erdogan and his son-in-law, Berat Albayrak, will be unwilling to take the steps necessary to shore up confidence and arrest the slide in the currency.
Of course the problem now is that we’re past the point of no return when it comes to monetary policy’s ability to convince markets the situation is under control. The central bank’s exceptionally ill-advised (if entirely predictable) decision to eschew a rate hike on July 24 proved, beyond a shadow of a doubt, that Erdoganomics is now enshrined, meaning rate hikes are anathema. But even if CBT could hike, it’s not clear it would make any difference. They would need to raise the repo rate by at least 1,000bps to make a dent, a prospect that seems far-fetched in the extreme.
Turkey, it would seem, now as two options: capital controls or an IMF bailout. The former seems more likely than the latter, as the political cost for Erdogan of agreeing to an IMF program less than two months after consolidating power would be too great.
On Sunday, in what might very well go down as one of the more catastrophic mistakes in the history of finance, Erdogan made clear his intention to go down with the ship.
Speaking to supporters in Trabzon, Erdogan seemingly accused the U.S. of being behind the 2016 coup. “They’re trying with money what they couldn’t do in a coup”, he said, before again calling for Turks to convert their dollars, euros and gold to lira.
“It’s foolish to think Turkey can be thrown off by FX”, he continued, adding that “those calling for [an IMF bailout] want Turkey to “give up its independence.”
Although the market knew Erdogan would be reluctant to go the IMF route, specifically taking it off the table is a potentially disastrous move.
On rate hikes, Erdogan quite literally suggested that he will die before he gives up on his perverse economic doctrines.
“As long as I’m alive, we won’t fall for the interest rate trap”, he insisted, before demonizing higher rates as nefarious tools that “make the rich richer and the poor poorer”. Apparently, Erdogan isn’t up to speed on the extent to which a decade of low rates and QE have been one of the driving forces behind increasing inequality in developed markets.
Erdogan then promised to “respond with new financial tools [against] the dollar” and said this about Ankara’s relationship with Washington:
We will say ‘bye-bye’ to those who are ready to give up their strategic partnership for their relations with terror organizations. We see the game you are playing; we dare you.
The market is going to call his bluff. And it is not going to be pretty.