Is The Turkish Lira Doomed?

[Swordsmyth]

Turkey's economic and currency implosion is getting worse by the day.
With investors increasingly concerned about Turkey's level of FX reserves and ability to defend the currency, on Wednesday ABN-Amro analyst Nora Neuteboom poured gasoline on the fire saying what everyone else already knows, namely that "given the relatively low reserves, Turkey cannot afford to deplete its reserves further by defending the currency," adding that "as investors are well aware of this fact, a little spark in, for example the tensions with the U.S., could easily trigger another lira sell-off."
Of course, with the Turkish lira already in freefall, we may not even need a spark, as the rout gets worse with every passing day.
To wit: on Thursday, the lira fell for a fifth day against the dollar, touching the lowest level in eight months as investors bid up the price of Turkish CDS which insure against a default on the nation’s bonds. The lira weakened as much as 1% to 6.2456, sliding below 7 per euro, while the cost of five-year credit default swaps climbed above 490bps for the first time since September.
The lira - which Bloomberg reminds us has been the worst-performing currency in the world this quarter - shed more than 4% of its value over the past five trading sessions amid the fallout from Turkey’s decision to re-run municipal elections in Istanbul.
And then, out of the blue, an unexpected attempt to restore confidence in the lira took place, when just after 6am ET, Turkey’s central bank unexpectedly raised borrowing costs for the country’s lenders on Thursday in an attempt to bolster the crashing currency. The decision effectively raised the cost of funding for banks by 150 basis points without an official increase in its benchmark interest rate, with the central bank explaining in a statement that the decision was due to volatility in financial markets.
What happened next? Well, there was good news and bad news.
First the good news: moments after the central bank announced it was suspending one-week repo auctions once again, ceasing to provide liquidity to lenders at its cheapest rate of 24%, and effectively requiring banks to obtain their Central Bank funding at the overnight lending window at an interest rate of 25.5%, 150bp above the repo rate, the lira initially trimmed losses, with the USDTRY sliding as much as 300 pips.
In the press release, the Bank noted: “Considering the developments in financial markets, it has been decided to suspend the one-week repo auctions for a period of time.”
Immediately, however, the skeptics emerged: "It is an attempt to slow down the rapid ascent of the dollar-lira pair,” Rabobank's Piotr Matys said. “But it will not change the underlying upside bias supported mostly by domestic factors - mainly political risk - with additional support coming from the negative external backdrop.”
Commenting on the move, Bloomberg economist Ziad Daoud agreed that the move would be futile, and at worst, accelerate the drop in the lira: "the tightening of monetary policy through the suspension of the one-week repo auction is unlikely to stem the decline in the lira - the problems today are more political than economic. And low interest rates on bank deposits limit the effectiveness of any hikes by the central bank."
As a reminder, the TCMB stopped one-week repo funding on March 22 but restarted on April 8. Given that the tightening is not done through the main policy rate but through shifting the funding to a different window, such a move was destined to "not be very effective as it seems to signal that this tightening is only temporary" according to Goldman, which adds that "shifting the funding window frequently rather than adjusting the main policy rate could undermine the effectiveness of monetary policy."
Well, for once Goldman was right, which also brings us to the bad news: not even two hours after the emergency central bank intervention, the attempt to restore confidence in the lira fizzled, as sellers returned in full force and sent the USDTRY back to where it was just before the central bank's suspension of the one-week repo auction...

... confirming that the market is no longer afraid of any central bank actions, unexpected or otherwise.

More at: https://www.zerohedge.com/news/2019...y-currency-intervention-fails-under-two-hours

 

[oyarde]

Well that place has a lot of upside or downside depending on your level of optimism . Personally I would be cautious . It is a country where really maybe only 70 percent of the population even think of themselves as turkish and per capta income is only about 9K a year.

 

[r3volution 3.0]

I have to admit that I'm not very familiar with Turkish monetary policy and the lira's forex situation, but, I will say this:

For all the people who dislike Erdogan (because he's "undemocratic"), do be aware that the political alternative is hardcore communism.

...something to ponder while sipping your raki.

 

[Swordsmyth]

I have to admit that I'm not very familiar with Turkish monetary policy and the lira's forex situation, but, I will say this:

For all the people who dislike Erdogan (because he's "undemocratic"), do be aware that the political alternative is hardcore communism.

...something to ponder while sipping your raki.

I have no hope for Turkey at all, the best possible outcome would be for it to split into smaller nations.

 

[r3volution 3.0]

I have no hope for Turkey at all, the best possible outcome would be for it to split into smaller nations.

The best possible outcome would be for a presumably dubious commission of historians to find that Erdogan is in fact the legitimate heir of the last Ottoman Sultan, and for Sultan Erdogan to then reconquer with minimal bloodshead the entirely of the former empire, beginning with the absolute catastrophe which is Syria. The worst thing that ever happened to the Arabs and other peoples of this region, in modern times anyway, was the collapse of the Ottoman Empire. It was a home for small peoples, a non-nationalistic federation of sorts, much like the Habsburg Empire in central Europe.

...but I'm a dreamer.

 

[Swordsmyth]

The best possible outcome would be for a presumably dubious commission of historians to find that Erdogan is in fact the legitimate heir of the last Ottoman Sultan, and for Sultan Erdogan to then reconquer with minimal bloodshead the entirely of the former empire, beginning with the absolute catastrophe which is Syria. The worst thing that ever happened to the Arabs and other peoples of this region, in modern times anyway, was the collapse of the Ottoman Empire. It was a home for small peoples, a non-nationalistic federation of sorts, much like the Habsburg Empire in central Europe.

...but I'm a dreamer.

So he can destroy the whole region the way he is destroying Turkey?

He is not only destroying them economically, he is destroying them politically, diplomatically, culturally, religiously and just about every other way possible.

 

[r3volution 3.0]

So he can destroy the whole region the way he is destroying Turkey?

So that the region doesn't get destroyed by the idiot nationalists-sectarians.

And he isn't destroying Turkey.

E.G. His "Islamism" consists of not prohibiting (not requiring, mind you: just not prohibiting) the head scarf.

Modern Turkey was founded by a national socialist fucktard; Erdogan is a big improvement.

...nevermind the hardcore communist opposition, who would come to power if he fell.

 

[Swordsmyth]

So that the region doesn't get destroyed by the idiot nationalists-sectarians.

And he isn't destroying Turkey.

E.G. His "Islamism" consists of not prohibiting (not requiring, mind you: just not prohibiting) the head scarf.

Modern Turkey was founded by a national socialist $#@!tard; Erdogan is a big improvement.

...nevermind the hardcore communist opposition, who would come to power if he fell.

He is destroying Turkey, I don't expect it to last as a unified country very much longer and he is making the opposition stronger.

 

[r3volution 3.0]

He is destroying Turkey, I don't expect it to last as a unified country very much longer and he is making the opposition stronger.

How; by not making concessions to them; by not giving them more free shit; by not allowing them to riot for bolshevism?

Once they decide to pursue bolshevism, fuck them; it would be unjust for taxpayers to use pamphlets when bullets are cheaper.

 

[Swordsmyth]

How; by not making concessions to them; by not giving them more free $#@!; by not allowing them to riot for bolshevism?

By his economic meddling and by his brutal suppression of his opponents.

 

[r3volution 3.0]

By his economic meddling and by his brutal suppression of his opponents.

His "economic meddling" (i.e relatively liberal policy) is the alternative to hardcore communism.

His "brutal suppression of his opponents" affects far fewer people than the border-kidnapping you favor, which, in contrast, accomplishes nothing.

Do you know who was pissed about the last coup? LGBTQ weirdos and associated degenerate communists.

It didn't bother the average Turk in the slightest.

 

[Swordsmyth]

His "economic meddling" (i.e relatively liberal policy) is the alternative to hardcore communism.

His "brutal suppression of his opponents" affects far fewer people than the border-kidnapping you favor, which, in contrast, accomplishes nothing.

Do you know who was pissed about the last coup? LGBTQ weirdos and associated degenerate communists.

It didn't bother the average Turk in the slightest.

His economic meddling is much worse than you believe and brutal suppression doesn't go over well unless economic prosperity comes with it.

I don't support anyone in Turkey but that definitely includes the Mad Sultan.

 

[r3volution 3.0]

His economic meddling is much worse than you believe and brutal suppression doesn't go over well unless economic prosperity comes with it.

Despite the efforts by CNN et al to discredit Erdogan, he's very popular in Turkey (why he keeps winning).

This is for the reason that the country is developing, fairly secure, not overrun by communist guerillas, etc.

He's much like ante bellum Assad.

I don't support anyone in Turkey but that definitely includes the Mad Sultan.

Yea, maybe some regime change by the absolute retards in the current administration would be helpful..

 

[Swordsmyth]

Despite the efforts by CNN et al to discredit Erdogan, he's very popular in Turkey (why he keeps winning).

This is for the reason that the country is developing, fairly secure, not overrun by communist guerillas, etc.

He's much like ante bellum Assad.

He didn't do so well in the recent elections even though he has locked up so much of his opposition and the country is about to collapse due to his economic incompetence.

Yea, maybe some regime change by the absolute retards in the current administration would be helpful..

That's the way you think, I think we should just sit back and watch it collapse while laughing.

 

[r3volution 3.0]

He didn't do so well in the recent elections even though he has locked up so much of his opposition and the country is about to collapse due to his economic incompetence.

Let me put my opinion in as few words as possible; Erdogan is the Turkish Pinochet.

He may be unsavory in certain respects; but you do not want Allende.

 

[Swordsmyth]

Let me put my opinion in as few words as possible; Erdogan is the Turkish Pinochet.

He may be unsavory in certain respects; but you do not want Allende.

Then he should get some competent economic advisors like Pinochet did and stop double-crossing every country he deals with.

 

[r3volution 3.0]

Then he should get some competent economic advisors like Pinochet did and stop double-crossing every country he deals with.

I guess we'll see; but, if he falls, you won't like the outcome (unless you like civil war and/or communism).

 

[Swordsmyth]

With the Turkish Lira soaring on Friday, on what in retrospect turned out to be massive, FX-draining commercial bank intervention in the currency market, some TRY bulls were hopeful that their endless, currency crushing anguish may have been finally over, if only for the time being. Alas, it was not meant to be, and the lira resumed its collapse on Monday, with the move sharply lower sparked by a Reuters report that Turkey is about to officially become a banana republic in which the central bank is used to prop up Erdogan's "executive presidency" because according to the report, Turkey’s Treasury ministry is working on legislation to transfer the central bank’s 40 billion lira ($6.6 billion) in legal reserves to the government’s budget to shore it up.
In what appears to be a roundabout way of saying the central bank - which can print lira - will be used to fund the government, a critical step that without fails ends in hyperinflation, economic and currency collapse, the Reuters sources said that the budget is deeper in deficit than expected, and so the central bank's help will be needed to plug it.
As Reuters notes, “legal reserves” are separate to foreign exchange reserves, and are what the central bank sets aside from profits by law to be used in extraordinary circumstances. At end-2018, they stood at 27.6 billion lira, according to the bank’s balance sheet data. A second source with knowledge of the matter said last year’s “legal reserves” combined with this year’s amounted to the 40-billion lira figure, which was cited by all three people who spoke to Reuters.
“The Turkish central bank has around 40 billion lira in legal reserves. The transfer of this amount to the 2019 central administration budget was seen as suitable. This step aims at improving and strengthening the budget,” the second source said. It remained unclear how much of the reserves would ultimately be transferred and what, if any, new requirements would apply to the central bank.

​

As Reuters adds, the transfer would mark the second recent move by Ankara to tap the central bank’s funds to boost its budget. In January, the bank transferred some 37 billion lira in profits to the Treasury three months earlier than scheduled.

“I do not remember the use of legal reserves before. This method came up to stop further deterioration of the budget,” the source said. “There needs to be a legislation to transfer the central bank’s legal reserves. The new legislation is planned to be presented to the parliament soon.” the source said.
​

As a reference, Turkey’s budget recorded a 36.2 billon lira deficit in the first quarter of 2019, and is expected to soar to 80.6 billion lira by year end, which means that not even the entire "legal reserve" fund will be sufficient to keep Turkey afloat.
Needless to say, the report spooked investors as it suggests that Turkey’s fiscal standing continues to deteriorate, and is fueling concerns that the government is using the central bank to finance its deficit.


As a result, the lira - which already was tumbling as part of a US-China trade fiasco - slumped back under below the psychologically important mark of 6 per dollar. It traded 2.44% weaker at 6.1288 against the dollar after touching a one-week high of 5.9571 on Friday.

Not helping the lira was a Bloomberg report that as of early Monday, companies bought around $300 million, as local firms took advantage of Friday's bouts of lira strength as an opportunity to scoop up dollars for Turkish companies saddled with a $315 billion foreign-exchange debt pile.
Putting Turkey's unsustainable financial picture in context, as of February, the country's non-financial companies’ hard-currency liabilities exceeded their foreign-exchange assets by $197 billion, equivalent to about a quarter of GDP, central bank data show. In other words, with every passing day, Turkey is getting closer to a dollar-denominated default, and its default risk is reflecting it: on Monday, Turkey CDS surged past 500 bps for the first time since September.

https://www.zerohedge.com/news/2019...urkeys-plans-transfer-66-billion-central-bank

 

[Swordsmyth]

After rebounding briefly back over 6.00 against the dollar earlier this week, the Turkish lira has been drifting lower again in the past few days, with the slump accelerating overnight even as most EM currencies rebounded on China stimulus hopes, after Turkey announced it would reintroduce a 0.1% tax on some foreign-currency transactions in the latest desperation move to increase budget revenue for the fiscally challenged nation, but risks further raising investor angst that the government is taking on an larger role in managing the market.
The tax, which had been kept at zero for over a decade, will be introduced on foreign-currency sellers in hopes of limiting the decline in the currency but will accelerate it instead as what little faith is left in the Turkish lira is extinguished. The tax won’t apply to the interbank market and credit transactions, as it is designed "more to discourage FX buying” than to raise funds, according to Erkin Isik, chief economist at QNB Finansbank in Istanbul.


Not helping the lira this morning, was the latest denial by Turkey that it would cancel its purchase of the S-400 Russian missile system, refuting a Bloomberg report from Monday. Speaking to reporters in Ankara on Wednesday, Foreign Minister Mevlut Cavusoglu said Turkey will press ahead with its plan to buy the S-400 air-defense missile system from Russia, ruling out a delay requested by the U.S.
“There is no delay or halt at this point,” Cavusoglu told reporters, defying the US demands for Turkey to cancel the Russian missile order.
Turkey’s plan to import Russian advanced weapons has added strains between the two NATO allies. The Trump administration last week asked Ankara to postpone receiving the advanced S-400 missile-defense system which was set for July, according to the people familiar with the proposal.
Following the FX tax news and the S-400 denial, the lira extended its losses against the dollar, trading 0.9% down at 1:25 p.m. in Istanbul.

The lira has weakened almost 13% versus the dollar this year, the worst performer in emerging markets after the Argentine peso. It was 0.7% weaker at 6.0546 per dollar as of 12:56 p.m. in Istanbul.

More at: https://www.zerohedge.com/news/2019...ransaction-tax-rebuffs-us-over-s-400-purchase

 

[Swordsmyth]

For months, the Trump administration had been warning, at first, then outright threatening Turkey against following through with an agreement struck last year to purchase the advanced Russian S-400 missile defense system, and despite several "fake news" reports that Erdogan had canceled the deal with Moscow, Turkey ultimately said it would go ahead and receive the Russian missiles, demonstrative flipping off its NATO allies.

But if Erdogan was hoping that Trump would be all bark and no bite when it comes to retaliating against this painfully obvious snub of its "western" allies, well he had another thing coming.
Late on Thursday, the Turkish lira suddenly tumbled when Washington made it clear that this aggression will not stand, and the White House said it had terminated a preferential trade agreement with Turkey, finding the country no longer needed help as a developing country. However, the US did halve tariffs on Turkish steel from 50% to 25%.
Stating that Turkey received the preferential treatment in 1975 under the Generalized System of Preferences (GSP), which allows products to enter the US duty-free, US President Donald Trump said in the proclamation, "I have determined that, based on its level of economic development, it is appropriate to terminate Turkey's designation as a beneficiary developing country effective May 17, 2019."
"Consistent with my determination that it is appropriate to terminate the designation of Turkey as a beneficiary developing country under the GSP, effective May 17, 2019, I have determined to remove it from the list of developing country WTO Members exempt from application of the safeguard measures on CSPV products and large residential washers," the proclamation said.
Mitigating the move, the White House also said that it will "remove the higher tariff on steel imports from Turkey" and instead impose a 25 percent ad valorem tariff on the imports from Turkey, "commensurate with the tariff imposed on such articles imported from most countries."
White House explained that the change is due to imports of steel articles from Turkey falling by 48% in 2018, “with the result that the domestic industry’s capacity utilization has improved at this point to approximately the target level recommended” in Commerce Sec.’s report.
In March, US Trade Rep Robert Lighthizer noted the administration's intention to remove Turkey from the list of nations benefiting from the GSP.
The announcement comes at a very painful time for Turkey, which has been gripped in a stagflationary recession since March 2019, which has sent the Lira plunging, while the country's inflation has soared. Predictably, with traders already on edge, and looking at how the US could retaliate for Erdogan's unwillingness to budge on the Russian S-400 order, the Turkish lira tumbled as much as 1%, as the USDTRY spiked from 6.058 to 6.10 before recouping some losses.

Earlier today, Moody's warned that if the Turkish government didn't put forward "a credible broad-based plan to address the structural issues" and avoid a downgrade, "and in the near-term dampen the market volatility pressure on the lira," it would result in a downgrading of the country's sovereign credit rating.
According to Moody's, the Turkish government's interest payments rose over 30% in nominal terms in 2018 and almost 50% in the first three months of 2019. The credit rating agency said it expects interest payments to reach 8.2% of government revenue this year, up from a mere 5.9% in 2017, "eroding" the government's fiscal strength.
But the bigger risk facing Turkey is that the amount of foreign denominated debt repayments for the balance of 2019 exceed the nation's entire stock of FX reserves, excluding gold.

Which means that within a few months, Erdogan may be forced to make the same choice as Venezuela: liquidate the nation's gold ,or hyperinflate. The third option, admit defeat and beg for an IMF bailout will never happen as long as "executive president" Erdogan is in charge.



https://www.zerohedge.com/news/2019...trump-terminates-preferential-trade-agreement