Lira Shows Turkey in 'Outright Crisis Mode,' Oppenheimer Says
President Recep Tayyip Erdogan has found a benefactor to help pull Turkey from the brink of a financial crisis as Qatar promised to invest US$15 billion in the country.
The lira extended gains to 6 per cent after Qatar’s Emir Sheikh Tamim Bin Hamad Bin Al Thani made the pledge after a 3-1/2-hour meeting with Erdogan in Ankara on Wednesday. It follows a string of urgent steps Erdogan has taken to protect its economy from an escalating feud with U.S. counterpart Donald Trump over an American pastor held in Turkey.
With the pledge, Turkey is reaping the rewards of standing by its wealthy Arab ally while Gulf neighbors led by Saudi Arabia cut off diplomatic ties with Qatar last year. Since tightening his grip on power in June elections, Erdogan’s relations with the U.S., a NATO ally, have deteriorated.
"That Turkish support for Qatar during the stand-off with Saudi Arabia finally paid off,” Tim Ash, a senior emerging-market strategist at BlueBay Asset Management LLC in London, said by email. “Let’s see if the Chinese and Russians put some money on the table."
While he seeks new alliances, Erdogan is also trying to repair his relationship with other traditional allies in Europe, such as Germany. The two countries fell out during the election over Berlin’s refusal to let Turkish politicians campaign on German soil. Erdogan spoke with German Chancellor Angela Merkel on Wednesday and will speak to French President Emmanuel Macron on Thursday.
“There isn’t much that Germany can do,” Holger Schmieding, the chief economist at Berenberg in London, said by phone. “Any help that Germany could give right now would be small compared to the problems at hand.”
Another potential flash point this week will be an appeals court decision on the fate of Andrew Brunson, the evangelical pastor Erdogan accuses of aiding a coup attempt against him two years ago. He’s being held under house arrest in Turkey. A lower court already turned down his lawyer’s request to free him and the U.S. has said it won’t negotiate until he’s released.
While the lira extended gains after the Qatari aid, it had already been rising on a series of measures from the nation’s banking regulator starting late Tuesday that made it harder for traders to bet against the lira and eased rules on restructuring troubled loans that have already topped US$20 billion.
Most notably, the regulator cut by half the amount of currency swap transactions banks can participate in to 25 per cent of shareholder equity, after imposing a 50 per cent curb on Monday. By driving up short-term borrowing costs, this makes it less appealing for investors, like hedge funds, to borrow liras on the offshore swap market so they can bet against, or short, it.
Investors, though, continue to demand higher interest rates -- something the central bank may struggle to deliver because it’s been under constant pressure from Erdogan to do just the opposite. While the lira climbed 5.3 per cent to 6.0294 per dollar by 7:06 p.m. in Istanbul, it’s still down 18 per cent this month.
So far, the steps "are aimed at the symptoms of recent lira weakness and not the cause," said Nigel Rendell, an analyst at Medley Global Advisors LLC in London. "The cure for a persistently weak currency is not rocket science - nor is it liquidity measures and policy tweaks - it is higher interest rates."
Markets weren’t all rosy. The cost of insuring Turkey’s sovereign debt against default -- already higher than Pakistan and Greece -- increased as the standoff between Turkey and the U.S. worsened. Bonds fell, pushing the yield on 10-year notes up nine basis points to 21.46 per cent.
Turkey announced on Wednesday a string of new tariffs ranging from 50 to 140 per cent on rice, alcohol and cars from the U.S. in retaliation for Trump’s move to slap taxes on Turkish steel and aluminum imports last week. The punitive steps come after Erdogan called on Turks to boycott American electronics, like the iPhone, which have in any case become a lot more expensive as the lira lost almost 40 per cent of its value this year.
The collapse, which intensified this month and triggered contagion that spread across emerging markets, is making it much more costly for businesses to refinance at least US$16 billion in bonds denominated in foreign currencies that are due by year-end, according to calculations by Bloomberg.
It total, companies have US$217 billion in net foreign-exchange debt, equal to about a quarter of gross domestic product, according to central bank data. While officially the bad debt ratio at Turkey’s banks is just 3 per cent, lenders are in the process of renegotiating upwards of US$20 billion of loans to try to prevent them from going into default.
Against this backdrop, the nation’s banking regulator said late Tuesday that lenders can now extend maturities on or refinance loans, issue new debt to help troubled companies, and seek new collateral to protect themselves. They can also demand debtors sell assets to repay loans.
It also said that until markets "normalize," it would temporarily stop applying the effect of day-to-day losses on the securities held by banks to their capital adequacy ratios.