Erdogan needs to move away from the edge to avoid a credit event

  • Erdogan needs to move away from the edge to avoid a credit event
    Independent.t. E.
    The currency crisis that has been brewing in Turkey for several months intensified this week, which ended yesterday morning, when the Lira lost more than 14pc hole saw its value, measured against the US dollar for 12 hours.
    https://www.independent.ie/business/world/erdogan-must-step-back-from-brink-to-avert-a-credit-event-37205116.html
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The currency crisis that has been brewing in Turkey for several months intensified this week, which ended yesterday morning, when the Lira lost more than 14pc hole saw its value, measured against the US dollar for 12 hours.

Lira is now down 26pc in the past month, and 40 units since the beginning of the year, raising investor concerns that the situation could quickly spiral from a currency crisis into a full-scale credit event.

Despite the growing pressure to reassure investors, President Erdogan yesterday left for optimism, saying that Turkey will prevail in the “economic war”, urging Turks not to panic or “bow to economic threat.”

This implies that it adheres to his nationalist message, at least, and still can resist the delivery of hard measures Turkey desperately needs.

Investors quickly understand with the Lira sliding 5pcs during his 15-minute speech, and then slowly slid further in the second half of the day, once again testifies to the deep concern about the management of the economy under Recep Tayyip Erdogan and Vladimir Albayrak, his son and the newly appointed Minister of Finance.

The situation facing the Turkish government is complicated by the fact that he now struggles with capital flight on three different fronts.

First, and most pressing issue for investors, the health of the Turkish corporate balance sheets. After the last financial crisis, Turkey has published impressive figures of growth, but in recent years this growth was accompanied by rising debt.

These Turkish borrowing was very much dependent on international funds, which are now the exposure of Turkish companies to the risk of a rollover in case of short-term extensions of credit cannot be agreed.

Adding to the financial problems of Turkey, the new retirement cost increases, said President Erdogan ahead of his recent election victory has further weakened the prospects for the public finances of Turkey.

Secondly, Turkey has huge problems in conditions of galloping inflation, which now accounts for 16pc year-on-year according to official estimates, even up to the last episode of the weakness of the Lira.

In the past, the Turkish authorities have always managed to contain the problem, being ready to take decisive action, such as in January 2014 when the Central Bank raised the rate on overnight loans to 4pcs at a night meeting.

Together with President Erdogan is currently pursuing a policy of growth, which had been re-elected, it contributes to keeping rates low to Stoke growth. Meanwhile, recent changes in the Turkish Central Bank (CB) has raised new questions, the Central Bank still has independence and autonomy to fight inflation, as they have in the past.

Finally, Turkey is also embroiled in a political impasse with the United States, which has signs resulted in sanctions and fines between the two NATO allies.

First, the US authorities looking into corruption in the Turkish Bank “Halkbank”, charged with violating the financial embargo against Iran. That is, the fact that Turkey has detained American pastor on charges of terrorism, which further angered the US administration and led to sanctions on two Turkish officials.

Yesterday in the afternoon, five-year credit default swap, the cost of insurance against default on government debt in Turkey reached 500bps, up to 40 PCs over the past two weeks and at levels not seen since the financial crisis of 2009.

The splash CD-ROM shows, investors are betting on Turkey still has problems paying its debt obligations and is a good barometer of investor fear, which are now in Turkey is riskier than Greece.

Looking ahead, it is really the actions of the Central Bank, which are the most important in the coming days. Still, they remained suspiciously quiet, deciding not to intervene and to fight against the recent weakness of the currency.

However, markets are now on edge, and lying back on the cbrt to act in order to reinforce inflation expectations and restore credibility.

The current market expects the rate hike is not less than 5pcs, from the current 17.75 PC interest rate, you will need to stem the tide of Lira losses and traders are nervously waiting for the announcement of any emergency Central Bank meeting that could take place next week.

Investors also hope for a more conciliatory tone with President Erdogan in the coming days.

In the past he has shown himself to be pragmatic when faced with a crisis, and often retreated from the brink and allowed officials to take the necessary steps, and instead it focuses on control of the narrative. If this is how he plays this time only time will tell.

If not the rumors about the possible introduction of capital controls on international transfers, and even potential IMF assistance program will continue to grow and will likely lead to further pain for the Turkish Lira.

Eoghan Sheehan is a Forex trader and emerging markets Bank of Ireland global markets

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