Turkish Lira in the Midst of a Perfect Storm
Turkey All-Set to Bid Adieu to Its Old Ally, says Erdogan

The Turkish continues to float but not in the sea of tranquility. Since Mr. Erdogan has taken Turkish monetary reins into his own hands, the lira has nose-dived by 31%. Turkey is all-set for facing another week of financial-market turmoil.

Press-ganged by U.S. sanctions and a new constitutional order that empowers Erdogan, the central bank, and finance ministry of Turkey did just slightly more than monitoring the worst market strike after the rout that contributed in the country’s downfall of the financial sector in 2001.

Turkey’s Banking Regulation and Supervision Agency narrowed the amount of foreign currency, swap-like transactions, and lira swaps to 50% of banks’ legal shareholder equity on Monday.

Calming the investors, Finance Minister Berat Albayrak announced in a newspaper interview on Sunday evening that the nation’s institutions are prepared to take the “required steps” to tranquilize the markets. He further declared that the action plan prepared by the ministry will be announced on Monday.

Turkish officers fear that even a huge upsurge in the borrowing cost might face a quick offset by another round of U.S. sanctions, whereas the investors continue to plead for some dramatic steps by the central bank to shore up lira.

Until and unless relations between the two NATO allies are not restored, no policy lever is worth pulling. Erdogan seemed to be disinterested to fulfill the demands put forth by President Donald Trump. The condition demanded the release of a U.S. evangelical pastor, Andrew Brunson, who is imprisoned by the officials of Turkey for participating in a 2016 attempted rebellion.

Erdogan called for resistance and declared that he will not give in to threats. A sensible solution requires either a humiliating reversal by the Turkish president or a token action by the Trump administration allowing the Turkish president to save face, but neither looks likely.

According to Refet Gurkaynak, a professor of economics at Bilkent University in Ankara, the Turkish government needs to acknowledge the dangers ahead as it is necessary to calm the markets. Although the central bank provides a stop-gap solution, the acknowledgment still holds importance.

He said, “Both because the lira return will matter some and, more importantly, because it will signal that they are not looking at off-market solutions such as capital controls, conversion of FX deposits and other unorthodox policies. To work, it will have to be large and would have to be accompanied by a ‘whatever it takes’ statement.”

Gurkaynak adds, “Seen from another angle, letting the pastor go would also only provide a respite for the economy already plagued by hundreds of billions of dollars in foreign debt, runaway inflation and one of the world’s largest current-account deficits.”

Putting a 2017 referendum into action, the Ankara paralysis followed snap elections that kept Erdogan at the helm and handed him exceptional powers, further weakening parliament. Some analysts consider this early vote as a strategic move to take steps before the economic downfall manifested.

Many of the Turkish officials, even the one at the highest levels, are unaware of what the new system means for their agencies or for themselves. Everyone simply defers to the leader in such case of a power vacuum.

Yet, privately the officials claim to be aware of what is needed, viz. an end to the spat with the U.S. and a message reassuring investor about the independence of monetary policy, and central bank, and fiscal tightening. There is only one person who could approve such action and coordinate, that is Erdogan himself.

Erdogan said Turkey is working day and night for fresh markets and new markets indicating that the country is ready to bid adieu to its old ally. He also ruled out an agreement with the IMF, saying those calling for it was really calling for the nation to relinquish its political independence. On interest rates, he called them a tool that merely makes the rich richer and vowed never to give in for as long as he’s alive.