Turkey | Central bank tries to contain crisis but currency keeps falling

Turkey’s central bank took action yesterday to free up cash for banks as the country grapples with a currency crisis sparked by concerns over President Recep Tayyip Erdogan’s economic policies and a trade and diplomatic dispute with the United States.

The Turkish lira has nosedived over the past week and tumbled another 7 percent yesterdayas the central bank’s measures failed to restore investor confidence.

The uncertainty pushed down world stock markets and briefly caused a sharp drop in the currencies of other emerging economies, like South Africa and India, amid concerns that the financial trouble could spread.

The lira hit a record low of 7.23 per dollar yesterday [Macau time] after Erdogan remained defiant in his economic policies and the standoff against the United States, a NATO ally.

“Turkey is faced with an economic siege,” Erdogan said, in the latest of a series of speeches. “We are taking the necessary steps against these attacks and will continue to do so.”

He has threatened to seek new alliances — a veiled hint at closer ties with Russia — and warned of drastic measures if businesses withdraw foreign currency from banks.

Erdogan also ruled out the possibility of higher interest rates, as they can slow economic growth. But independent analysts say higher rates are needed urgently to stabilize the currency and Erdogan’s hard line is one of the reasons investors are worrying.

Erdogan won a second term in office in June under a new system of government that gives him sweeping powers. He has used his new power to put pressure on the central bank to not raise rates.

On Monday, the central bank announced a series of measures to “provide all the liquidity the banks need” — but offered no hint of a rate increase.

The moves are meant to grease the financial system, ease worries about trouble at banks and keep them providing loans to people and businesses.

In times of high uncertainty, banks tend to shy away from lending to each other. A so-called credit crunch, a lack of daily liquidity, can cause a bank to collapse.

Simon Derrick, chief currency strategist at BNY Mellon, said the central bank’s measures are unlikely to be enough. In the absence of a decisive rate increase, he said, “it is…hard to look at these announcements as being anything more than temporary calming measures, rather than solutions to the problems at hand.”

The lira has now dropped some 45 percent this year.

Part of the concerns about Turkey are the same as other emerging markets. As interest rates rise in the U.S., investors pull their money out of countries that had enjoyed strong economic growth but are perceived as somewhat riskier.

Turkey’s situation is among the most precarious among emerging markets because so much of its growth was fueled with debt in foreign currencies. That makes the currency drop so much more painful as it will increase the cost of servicing debt for Turkish companies and banks and could lead to bankruptcies.

So far, the impact on developed economies has been relatively contained. Stocks have fallen modestly in the U.S. and Europe since last week, but analysts do not see a big risk of financial turmoil. A few European banks have business there that could lead to losses, but that is not expected to pose a systemic danger to the region. AP