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27.10.2020 – Special Report. All-time low for the Turkish lira: the price of the consumptive currency slipped below the much-noticed 8 lira to the dollar mark on Monday. Overall, the currency has fallen by 15 percent against the greenback in the past three months. The lira has also just reached an all-time low of 9.53 lira against the euro. There is no end in sight to this frenzy of depth. For Ankara continues to rattle its sabre in the Mediterranean and Corona has killed Turkish tourism.

Imperial megalomania

Turkey has unilaterally expanded its maritime territory and is drilling for natural gas in Greek waters. It may soon be facing war with Hellas, but also with Cyprus and Israel. The allies want to build a gas pipeline to Italy, which will run right through the area now occupied by Ankara. Because of the interference in the Libyan civil war, there is also the threat of a military conflict with Egypt. Moreover, Turkey is setting fire to Nagorno-Karabakh on the side of Azerbaijan. Turkey has fallen out with France. American sanctions are threatened because of the use of the Russian S-400 missile defence system.

Dwindling foreign exchange reserves

All quite heavy burdens for the empty treasury. Investors flee the country, investors turn away. This year foreign investors have sold Turkish shares and bonds worth 13.3 billion dollars, the news agency Bloomberg reports – the largest amount since about 2005. Ergo, Ankara burned its currency reserves to support the lira. Without success. This year alone, the value of the lira has fallen by more than 25 percent. Only the Brazilian real was even weaker. Since spring 2008, the lira has lost half its value against the dollar, and 85 percent since the financial crisis.

Back and forth in monetary policy

Moreover, the Turkish central bank lacks continuity. Investors no longer know how to trade the erratic course of the authoritarian-led state. Last week, the Turkish central bank shocked the market by not raising interest rates significantly, contrary to expectations. On average, the consensus among 27 analysts was that the CBRT set the interest rate by 175 basis points to 12 percent – and that the lira will appreciate strongly thereafter. But last Thursday the central bank left the rate unchanged, citing brightening inflation expectations.

Full of surprises

As late as 24 September, the central bank had surprised forex traders by raising the interest rate by 200 basis points. The central bank raised key interest rates completely unexpectedly from 8.25 to now 10.25 percent – this was the first interest rate increase in about two years. Remarkably, this was apparently done against the will of President Recep Erdogan – who wants cheap loans to boost economic growth. Even more surprising was the reasoning of the guardians of the currency: “Inflation has followed a path that was higher than expected”. Steps to tighten monetary policy would have to be stepped up in order to contain inflationary expectations. So within a month the situation has turned around – believe it or not, you will be blessed.

Just before the junk level

No wonder that investors are turning away angrily in view of the strange monetary policy. The rating agency Moody’s reacted last month by downgrading the credit rating. Government bonds received a B2 credit rating, the lowest ever in the country’s history. Previously they had been at level B1. Out of 21 levels that Moody’s knows for the rating of sovereigns, Turkey thus slips to the 15th level. The country is now on a par with countries like Sri Lanka and Tunisia, and even slightly worse than Rwanda, Bahrain and Albania. This means that Turkey is now only two notches above the “junk level”, which starts with a rating of Caa1.
Moody’s verdict was devastating: “Political pressure, limited central bank independence, slow reactions by those in charge and a lack of predictability of their reactions increase the likelihood of disorderly exchange rates and economic adjustments”.

Maybe the help from abroad

Our conclusion: we had foreseen this development. It is not foreseeable how this trend will be reversed. Wars, Corona, a strange monetary policy. There is much to suggest that a currency reform is imminent, if the decline in exchange rates continues. The Turks are reacting with foresight – the “Wall Street Journal” recently reported a real rush for gold. The buying frenzy is unusual because people usually make their money at the all-time high. The paper also registered a run on safes for installation in the home. So the inhabitants are apparently expecting a bank crash. Indeed, the European Bank for Reconstruction and Development recently warned that banks might have to pay for the government’s forced expansion of lending to stimulate the economy with high bad debts.
However, the slide of the lira could be halted by a small injection of money from Russia or China. If Moscow or Beijing buy lira or provide dollar loans. So traders and investors should screen the news for such a development. The Bernstein Bank wishes good luck!


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