Despite Turkish markets being on holiday starting tomorrow, the lira continued to slide. On Friday, S&P cut Turkey to B+ from BB- . The rating agency had the following to offer with regard to the outlook:
The negative outlook reflects our view that Turkey’s economic, fiscal, and debt metrics could deteriorate beyond what we expect, if political uncertainty contributed to further weakening in the investment environment, potentially intensifying balance-of-payment pressures. We could also lower the ratings if we assessed Turkey’s monetary policy credibility as deteriorating due to government intervention.
We could revise our outlook on Turkey to stable if the government’s fiscal deficits remained modest and the independence of key institutions was not eroded.
Good luck with that latter bit about “independence” not being further “eroded.”
But never fear, Qatar is here. Last week, Sheikh Tamim bin Hamad Al Thani agreed to $15 billion in direct investments to help Turkey weather the storm. Why would the Sheikh come to Erdogan’s rescue? Well, for one thing, Qatar has skin in the game. Qatar National Bank owns Turkish lender Finansbank, and QNB Finansbank accounts for 14% of Qatar National Bank’s group net profit. You can see the jitters starting to show up in QNBK.
But perhaps more to the (geopolitical) point, Ankara stood by Doha last year during the Saudi-led embargo. There’s more on that in our original post from last week on the Qatar lifeline.
On Monday, the market got the first definitive evidence of Qatar’s assistance in the form of a $3 billion currency swap agreement. Here’s how Qatar’s central bank characterizes this:
[It will] facilitate exchange of trade between the two countries while providing liquidity and support financial stability.
Right. In other words: it’s a $3 billion lifeline designed to prove Doha is serious about effectively guaranteeing the near-term viability of Turkey’s financial system.
For her part, SocGen’s Phoenix Kalen sees the lira weakening to 8. In a note out Monday, Kalen describes the Maginot line, so to speak, for the Turkish Central Bank:
[It’s] the pain threshold that compels Turkey to compromise on some of its strategic objectives.
Kalen continues by noting that the probability of CBT raising the benchmark rate, currently at 17.75%, again before their next scheduled meeting on September 13th is now low. Earlier on Monday, we took a deep dive into Turkey’s efforts to “hike without hiking”, as it were. Effectively, the one-week repo rate is now irrelevant.
She’s not the first person to predict an 8-handle on the lira. Last week, Wells Fargo suggested that’s likely in the cards sooner or later.
In any event, it’s a good thing Qatar is at least a little bit serious about this, because at this juncture, the market thinks Turkey is more likely to default than Greece.