Turkish President (and man who has never met a rate hike he liked) Recep Tayyip Erdogan has had it with central bank governor Murat Cetinkaya who, apparently, declined an “informal” request to resign.
Of course, one doesn’t simply “refuse” a request from Erdogan (formal, informal or otherwise), which is why, on Saturday, Cetinkaya was removed and replaced with his deputy Murat Uysal.
You might recall that on June 12, CBT kept rates on hold ahead of the Istanbul re-run election.
Five days later, the central bank rolled out a desperate sounding facility which allowed lenders to tap liquidity at 100bp below the benchmark rate in proportion to the amount of government debt primary dealers snapped up at auctions. That was both a stealth rate cut and a bid to ensure demand didn’t dry up following the Moody’s downgrade.
At the time, we were a bit surprised that CBT was allowed to keep rates on hold, even as they dropped their tightening bias. On June 17, for instance, we wrote the following:
Last week, CBT kept rates on hold, which was a relief considering there was an argument for easing (not by any rational standard, of course, but considering the Fed is on the verge of cutting rates and the lira had temporarily stopped plunging, Erdogan might have insisted on looser policy ahead of the Istanbul vote).
Well, as it turns out, Erdogan was not pleased.
“Tension between Cetinkaya, whose four-year term was due to end in 2020, and the government worsened after a monetary authority meeting on June 12, when he kept borrowing costs unchanged”, Bloomberg says, citing people familiar with the matter who “asked not to be identified because they aren’t authorized to speak publicly” (and also because speaking to the press about something like this without permission would get you thrown in jail in Turkey).
Sources told Reuters the same thing. “President Erdogan was unhappy about the interest rate and he expressed his discontent at every chance. The bank’s decision in June to keep rates constant added to the problem with Cetinkaya”, a senior government official said, speaking, again, on condition of anonymity. “Erdogan remains determined to improve the economy, and for that he made the decision to remove Cetinkaya”.
Ekrem Imamoglu’s landmark victory in Istanbul was seen, in part, as an indictment of Erdogan’s handling of the economy. Last year was a rollercoaster and the lira’s summer 2018 plunge very nearly drove Ankara into the arms of the IMF. Things calmed down in October after the release of detained pastor Andrew Brunson helped improve relations with Washington, but 2019 brought more trouble.
Between the slumping economy, depleted foreign reserves, the erosion of democracy, the absence of central bank independence and the S-400 soap opera, Turkish assets came under siege, prompting Erdogan to resort to a series of measures to shore up the currency. Ahead of the local elections in March, he effectively trapped investors in the lira, causing all manner of consternation. Whispers about capital controls grew louder and Ankara was unable to soothe investors, who were spooked further by allegations that the central bank is inflating reserves with swaps. Late in May, Turkish stocks fell into a bear market.
Over the past month, reports suggested banks are being bullied into effectively underwriting fiscal largesse at Erdogan’s urging (i.e., forced to buy more bonds at auction than they need in their capacity as market makers). He also compelled pension funds to hold a minimum amount of Turkish stocks and bonds.
Some hoped Erdogan’s willingness to accept the results of the Istanbul vote was evidence he might rethink his approach to governing, including adopting a more hands-off approach to the central bank, which has become increasingly beholden to Erdogan-o-mics.
Those hopes are now dashed.
Last July, after consolidating power in a position he (basically) made up, Erdogan shocked markets by appointing Berat Albayrak, his son-in-law, as economic czar. Technically, Albayrak was installed as finance minister. Unsurprisingly, Albayrak was involved in sacking Cetinkaya. “The finance minister demanded his resignation, but Cetinkaya reminded them of the bank’s independence and declined to resign”, another government source told Reuters.
This comes at an extremely inopportune time from a market perspective. Turkey is all set to take delivery of the controversial S-400 Russian missile systems, a move that was expected to result in Ankara’s expulsion from the F-35 program and, likely, US sanctions. Trump, however, cast doubt on that last weekend. “It’s not [Erdogan’s] fault”, Trump said. “We have a very complicated situation because the president was not allowed to buy the Patriot missiles. You can’t do business that way”.
“Nice timing given the assumption is that S400s arrive this week. Maybe they will be deployed to defend the CBRT”, BlueBay’s Tim Ash quipped on Saturday.
“Those who removed the central bank governor overnight have lost the right to demand confidence in the country’s economy”, CHP said. “The central bank is a captive being kept in the palace”.
“By abruptly dismissing Cetinkaya, Erdogan reminded everyone who is in charge of monetary policy”, Robobank’s Piotr Matys declared.
“[I] don’t know why Erdogan does not just take the job himself”, BlueBay’s Ash went on to fatalistically lament. “He seems to know better than financial professionals everything there is to know about monetary policy and central banking. Like Trump”.