It’s been readily apparent for months that Turkey was careening towards another currency crisis.
After all, CBT governor Murat Uysal has delivered a total of 1,525bps worth of rate cuts in less than a year on the job, taking the benchmark all the way down to 8.75%.
Uysal of course replaced Murat Cetinkaya last summer, after Cetinkaya failed to slash rates fast enough to appease a perpetually impatient Recep Tayyip Erdogan, whose “unorthodox” (and that’s a laughable euphemism) economic views generally hold that lower rates lead to lower inflation and, by extension, currency stability.
Suffice to say that theory doesn’t always hold up well in the face of reality. See the visual below, for example.
A couple of weeks back, after the eighth cut of Uysal’s tenure, I politely suggested that Turkey was “playing with fire“. It was hardly a novel observation. Everyone knows this will probably end in tears, although Erdogan will likely manufacture a way out of it.
The latest rate cut took real rates even further into negative territory. Although moderating inflation helps ameliorate that, the situation isn’t favorable – not for a country that relies on external financing.
Turkey needs to roll something like $170 billion in foreign currency debt over the next 12 months, and between jittery markets (due to the coronavirus) and Erdogan’s legendary belligerence, Ankara is taking a big risk at a delicate juncture.
Turkish banks have been blowing through billions to defend the currency, and while Uysal insists on the country’s commitment to a float and swears there’s no specific level that Turkey targets, the panic is evident. The government has put in place a series of measures aimed at squeezing anyone betting against the currency, and this is hardly the first such episode.
During a call with investors on Wednesday, Erdogan’s son-in-law, Berat Albayrak, said everything is fine. Reserves are “sufficient”, he imagined.
“Turkey’s room for maneuver on the currency front is disappearing as net international reserves (including FX swaps) continue to drop”, SocGen’s Phoenix Kalen wrote last week. “In battling pressures on the currency, the depletion of reserves suggests that Turkish officials may be forced to consider letting the currency float fully, or alternatively impose tighter capital controls”, she added.
Turkey is angling to get access to the Fed’s swap lines, which were extended in March to include New Zealand, Australia, Brazil, South Korea, Denmark, Norway, Singapore, Sweden and Mexico, in addition to the standing arrangements with the BOC, the BOE, the BOJ, the ECB and the SNB.
Asked Wednesday about the prospect of extending a life raft to Turkey, Richmond Fed chief Thomas Barkin seemed to shut the door. The Fed’s swap lines are for countries which have “a relationship of mutual trust” with the US, he said. “It does not cover all the countries”.
Here’s a bit more from SocGen’s Kalen:
The latest weekly data shows Turkey having USD 25.8 billion in net international reserves including CBRT swaps. If we exclude the USD 25.9 billion from the CBRT’s short FX swap position (reported for February 2020) from net reserves, then Turkey likely already has negative net reserves. Since then, with the CBRT’s April 22nd rate cut of 100bp and the resulting pressure on TRY, our trading desk estimates that intervention efforts may have deployed USD 600 million – USD 1 billion in reserves to support the currency.
Fast forward to Thursday and, following a Wednesday AA story tipping the move, Erdogan banned local lenders from engaging in lira transactions with Citi, UBS and BNP. The AA story blamed “London-based institutions” for orchestrating a “manipulative attack” on the currency.
Here’s an (extremely) rough translation of BDDK’s announcement:
BNP Paribas SA, Citibank NA, UBS AG established abroad determined that they did not meet their Turkish lira liabilities against their banks in due time the rights of savings owners and banks in a regular and safe manner. Prevention of transactions and practices that may jeopardize its operation and the credit system Turkish Lira including the banks in question to ensure that they operate effectively foreign banks that have been delayed in fulfilling their obligations and promised the banks of the banks established abroad, with a leg of Turkish Lira not to make a foreign exchange transaction and the transactions due in this nature the regeneration.
This isn’t really surprising, although I suppose it will be accompanied by the usual astonishment from those who refuse to accept the reality of doing business with autocrats. Erdogan has a long history of blaming purportedly nefarious foreign actors when things go “wrong” for the domestic economy, and especially when the currency goes into a tailspin. And, as noted above, he’s been squeezing the offshore market for weeks.
“Turkey’s move against three banks is what Thailand did to all offshore banks in 1997”, EM veteran Paul McNamara remarked. “[That] ended up with two different THB quotations, only unified after the baht crashed”.
BlueBay’s Tim Ash called it a “hugely damaging move which will make it harder to transact in lira and therefore harder for the economy as a whole”. Erdogan, Ash said, is “in effect declaring war on foreign banks” and that’s “not going to improve the mood music around Turkey”.
Cristian Maggio, head of EM strategy at TD, summed it up: “We already have one foot in the hole of a currency crisis”.
This is nothing new for Erdogan. He’ll figure it out. Or not.