Erdogan Resignation Call Chokes Lira Prop-Up Plan: Turkey Credit

Dec 26, 2013 4:03 am ET

(To be sent this story, click here. For more credit-market news, TOP CM.)

Dec. 26 (Bloomberg) -- Turkish central bank Governor Erdem Basci’s attempt to buy himself time to boost the lira amid a corruption probe took a beating after a third minister resigned and urged Prime Minister Recep Tayyip Erdogan to do the same.

The lira retreated as much as 0.7 percent yesterday, having earlier appreciated by the same amount before Environment and Urban Works Minister Erdogan Bayraktar stepped down. The Borsa Istanbul 100 Index dropped to the lowest level in almost four months. The lira, which breached a record low two days ago, is this month’s worst-performer in emerging Europe and Africa. Erdogan responded to the political turmoil with a cabinet reshuffle yesterday, replacing 10 ministers.

Governor Basci stepped up efforts to stem the currency’s slide after police arrested the sons of two Turkish ministers and a bank chief on Dec. 17 and the Federal Reserve said the next day it will reduce its $85 billion monthly bond-buying program by $10 billion. The central bank said Dec. 24 it would sell at least $6 billion through the end of January and make it more costly for lenders to park foreign currencies in the bank’s coffers.

“Minister Bayraktar’s surprise statement has nullified Basci’s efforts,” Haluk Burumcekci, chief economist at Burgan Securities in Istanbul, said by phone yesterday. “Prime Minister Erdogan didn’t directly respond to that call for him to quit, but that may change in the following days.”

Political Tensions

Erdogan replaced Bayraktar, along with Economy Minister Zafer Caglayan and Interior Minister Muammer Guler, after changes to 10 cabinet members were approved by President Abdullah Gul late yesterday. Among other ministers who were replaced was Egemen Bagis, the EU affairs minister who has also been implicated in the corruption investigation, according to Hurriyet newspaper on Dec. 19.

The lira rallied 1 percent on Dec. 24 after Basci announced the new tightening measures. Gains continued yesterday after the economy and interior ministers, whose sons were arrested last week as part of the corruption investigation, stepped down.

The stock index rallied as much as 1.3 percent on bets the resignations would “somewhat lessen the political tensions,” Burcin Metin, head of currency trading at ING Bank AS in Istanbul, wrote in e-mailed comments.

Erdogan’s Approval

Shares, bonds and the currency then swung lower after Bayraktar, the environment minister, said in an interview with NTV television that all of his actions had Erdogan’s approval and the prime minister should also resign amid the corruption probe. The stock index ended the day 4.2 percent lower. U.S. and European markets were closed for the Christmas holiday yesterday.

“This latest resignation shows the debate will continue,” Evren Kirikoglu, a strategist at Akbank TAS in Istanbul, said in an e-mail. “Foreign investors view this as an indication that the parties subject to the probes are not in agreement among themselves.”

In a bid to buttress the lira yesterday, which approached its 2.0992 all-time low in intraday trading, the central bank sold $450 million at a currency auction. That took the total to $15 billion since the sales started on June 11 to stem a selloff spurred by anti-government protests at the time and as it became clear the Fed would start scaling back monetary stimulus.

Fethullah Gulen

Turkish assets were further pressured this month on concern that a power struggle between the government and followers of U.S.-based Islamist cleric Fethullah Gulen, who has a wide following in the police and judiciary, will escalate. The prime minister removed hundreds of police chiefs and bureaucrats in response to the probe, which also implicates the chief executive officer of Turkiye Halk Bankasi AS.

The central bank said Dec. 24 it will sell at least $3 billion by year-end and a minimum of the same amount next month. Policy makers will also change the reserve options mechanism, or ROM, which allows lenders to hold part of their required lira reserves in foreign exchange or gold at specified conversion rates.

Basci will raise ROM rates from Jan. 1, with lenders wanting to keep more than 40 percent of reserves in the U.S. currency facing conversion rates of as high as 3.2 for the uppermost band, up from a high of 2.8 previously. This week’s measures will inject about $1 billion into the financial system, the central bank said on Dec. 24.

Depreciation Trend

Increasing foreign-currency auctions “can only smooth the depreciation trend rather than reversing it,” Gokce Celik, an economist at Finansbank AS in Istanbul, said in a note e-mailed on Dec. 24. “The central bank’s reserves are not strong when compared to Turkey’s large external financing needs.”

The country, faced with a widening current-account deficit, had foreign-exchange reserves, excluding gold, of $115 billion as of Dec. 13, according to data compiled by Bloomberg, compared with $480 billion for Russia and $376 billion for Brazil.

Three-month implied volatility for the lira was little changed near a three-month high yesterday. The two-year note yield fell 12 basis points to 9.56 percent at 6:44 p.m. in Istanbul. The currency lost 0.6 percent to 2.0905 a dollar.

“In the medium term, the lira should depreciate,” leading the central bank to tighten policy further, Guillaume Tresca, a senior emerging-market strategist at Credit Agricole SA in Paris, said in e-mailed comments on Dec. 24. The currency may decline to 2.1 per dollar by the end of March, he said.

--Editors: Daliah Merzaban, Justin Carrigan, Matthew Brown