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Lira Collapses Anew As Erdogan Digs In, Tempts Fate

"Turkey will not convert or seize FX deposits."

Over the weekend, Recep Tayyip Erdogan dug in his heels amid Turkey’s worsening currency crisis.

Calls for draconian rate hikes and/or an admission from Ankara that an IMF program might be necessary were not only ignored, but specifically ruled out by the Turkish leader, who quite literally claimed he would rather die than succumb to “the interest rate trap”.

“It’s foolish to think Turkey can be thrown off by FX”, he said on Sunday in Trabzon, adding that “those calling for [an IMF bailout] want Turkey to give up its independence.”

Erdogan’s trio of defiant Sunday rallies came on the heels of a Saturday speech in which he lambasted the Trump administration and variously suggested Turkey would be willing to see its relationship with the U.S. fall apart completely. Those comments echoed a New York Times Op-Ed penned by Erdogan and published on Friday evening. Here’s an excerpt from his 800-word essay, for those who might have missed it:

Before it is too late, Washington must give up the misguided notion that our relationship can be asymmetrical and come to terms with the fact that Turkey has alternatives. Failure to reverse this trend of unilateralism and disrespect will require us to start looking for new friends and allies.

Exactly none of that was comforting for anxious markets and in decidedly thin early Asian trading, the lira was quoted above 7. According to Bloomberg’s data, USDTRY surged as much as 13% to 7.2362.

TRY

(Bloomberg)

“A limited number of banks appeared to be providing quotes in early trading and bid- ask spreads from most were at least 0.02 lira per dollar”, Bloomberg notes.

In a bid to stanch the bleeding, BDDK imposed swaps limits. Swap, spot and forward transactions with foreign investors will be limited to 50% of a bank’s equity, the watchdog said in a statement.

Finance Twitter was amused with the open.

Cameron thinks you’re all crazy:

1-month implied vol. is near 50.

VolTRY

(Bloomberg)

“I’m calling out to industrialists, do not attack banks to buy FX”, Erdogan said at his third rally of the day, before declaring that “it is industrialists’ duty too to keep this nation on its feet.”

Ominously, Erdogan said this next:

Otherwise we will set into motion our plan B and C.

That certainly seems to suggest that capital controls are right around the corner.

According to Kuwaiti Al Jarida, Berat Albayrak (Erdogan’s son-in-law and newly-appointed economic czar) was in Kuwait this weekend to explore possibilities for Kuwaiti investments in Turkey that might help stabilize the situation. Albayrak is also expected make stops in other GCC countries, the paper says.

Do note that Gulf banks have skin in the game here and were hit hard on Sunday as investors worried about their exposure.

As the lira careened past 7, Albayrak had the following to offer which we’ll present without further comment.

Turkish institutions will take necessary steps to calm markets and will make necessary announcements as of Monday. We have prepared an action plan with our banks for real sector cos including SME’s who are most affected by FX fluctuations. We will take necessary steps along with our banks and BRSA. The state of the currency cannot be explained by economic data. This is an indicator of a clear attack. This attack by the biggest player of the global financial system will cause the same effects in all emerging markets. Turkey will not convert or seize FX deposits. Fiscal discipline is an important part of our New Economy Stance. We can implement a ‘Fiscal Rule’ if necessary.

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