Lira tumbles as Trump deals crumbling currency yet another blow

August 10, 2018 | By | Reply More

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The lira plunged as much as 16.9%, reaching yet another record low, and stocks slid as much as 8.8% as the US move dealt yet another blow to a currency buckling under the weight of runaway inflation.

A customer counts Turkish lira banknotes after visiting a currency exchange in Istanbul, Turkey, on Friday, March 16, 2018. (Bloomberg pic)

ISTANBUL: Turkey edged closer still to a full-blown financial meltdown as US President Donald Trump authorized a doubling of some tariffs on the nation and investors lost faith in policymakers’ ability to contain a debilitating market rout.

The lira plunged as much as 16.9%, reaching yet another record low, and stocks slid as much as 8.8% as the US move dealt yet another blow to a currency buckling under the weight of runaway inflation and one of the widest current-account deficits in emerging markets. With the turmoil in Turkey fueling contagion fears, investors shunned riskier assets and sought safety in developed nations’ bonds. Treasuries and bonds rallied. South Africa’s rand, the Argentine peso and global stocks fell.

Turkey’s bonds also slumped, sending benchmark yields to an all-time high, after President Recep Tayyip Erdogan took a combative stance against markets. In his first public address since a rout sparked by the US decision to sanction two government ministers, he called on Turks to sell their foreign-exchange holdings. “It’s a national, local struggle. It’s going to be my nation’s response to those waging an economic war against us,” Erdogan said.

Treasury and Finance Minister Berat Albayrak, who spoke moments later at a press conference to announce Turkey’s “new economic model,” failed to offer a policy message that soothed investor concerns.

“This is not going to end well,” said Win Thin, a strategist at Brown Brothers Harriman & Co. “The way things are going, markets need to be prepared for a hard landing in the economy, corporate defaults on foreign-currency debt and possible bank failures.”

An aggressive rate hike by the central bank, in the order of 1,000 basis points, would be a “good start” at this point, according to Paul Greer, a money manager at Fidelity International in London. “While Turkey’s fundamental challenges are numerous, there are plenty of straightforward textbook solutions which, if implemented, can halt the downward spiral of investor confidence and asset prices.”

Policy Inaction
After the central bank unexpectedly held its policy rate steady last month, even with inflation running at more than three times the target, investors were looking for any signs on Friday that authorities may resort to some damage control. The monetary authority isn’t scheduled to set rates again until Sept. 13.

The lira has tumbled 40% against the dollar this year, overtaking the Argentine peso as the worst emerging-market currency. The slump threatens to scare away the foreign capital that Turkey depends on to finance its large external deficit while hampering companies’ ability to repay overseas loans.

‘Complete Crash’
“Seems like a complete crash, so they need to act now,” said Morten Lund, a strategist at Nordea Bank AB in Copenhagen. “The lira will keep falling if they don’t hike rates today.”

The government cut its 2018 growth target Thursday to less than 4% from 5.5%, a sign that it is willing to accept a more moderate pace of expansion in an effort to rebalance the economy.

The revisions are unlikely to be enough “to lead to a recovery in markets,” said Erkin Isik, a strategist at Turk Ekonomi Bankasi AS. “If the currency remains at current levels, headline inflation is likely to approach 18% year-over-year by September. As a result, the current policy rate at 17.75% is not tight enough.”

The market rout on Friday was compounded by a Financial Times report that said the European Central Bank has grown concerned about the exposure of some euro-zone banks to Turkish assets following the lira’s plunge.

“The key to any hope of Turkish stability is the ability for banks to roll over syndicated loans — so far, that’s been absolutely fine,” said Paul McNamara, a money-manager at GAM UK in London. “I think the FT thing about the ECB being worried about Turkey exposures is a huge new factor.”

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