The market hit the Turks again: the country is halfway in the currency crisis

The lyre fell again

The Turkish lira was also close to 7.27 against the dollar on Thursday, setting another record level in the exchange rate. The Turkish currency has depreciated 5% in the past month, and has fallen almost 20% since the beginning of the year.

The weakening of the lyre is basically due to two reasons:

1. The country’s external financing needs are important, but foreign exchange reserves are constantly decreasing, and it is becoming increasingly difficult to obtain foreign exchange.
2. The coronavirus epidemic is also at its peak in Turkey, further exacerbating the already difficult situation in the economy.

Seeing the drop, Turkish supervisors banned three foreign banks, BNP Paribas, UBS and Citibank, from trading on the lira on Thursday, which they hope will ease pressure on the currency. They also announced that they would take legal action against the “London-based institutions” because they said they had launched a manipulative attack on the lira.

Turkey urgently needs currencies, with a control on the Fed

For the above reasons, in addition to the significant drop in the lira, foreign capital also moved from the country. According to a recent JP Morgan summary, foreign investors have already withdrawn $ 5.4 billion from Turkish bonds since the beginning of the year. The worst month was March with the outbreak of the coronavirus epidemic, when $ 2 billion left the country, but the withdrawal was already $ 1.8 billion in February and $ 1.1 billion was withdrawn even in April.

In practice, amid a general outflow of capital from emerging markets, Turkey now appears to be the most vulnerable.

And the withdrawal of capital from lira-denominated bonds poses increasingly serious financial difficulties for the country, as foreigners would have to be replaced. In addition, a significant part of Turkey’s debt is in dollars, which would require the country to have foreign exchange so as not to absorb the reserve with repayments.

To increase the need for foreign exchange, Turkish leaders hoped they could conclude a foreign exchange deal with the Fed. Under such lines of exchange, the United States Federal Reserve accepts that country’s currency in exchange for dollars, but in March, when it spread to several emerging countries, Turkey was not included in the circle. In a conference call with investors on Wednesday, the Turkish finance minister was optimistic that they would soon receive this right from the Federal Reserve. However, a US Federal Reserve. USA Unnamed stated in response that These exchanges are based on “mutual trust”, which subtly sends a message to the Turks that this is not the case for them.

And if Turkey does not receive dollars, it could soon have financing problems. The country’s net foreign exchange reserves were still around $ 40 billion at the beginning of the year, which has now fallen to $ 28 billion. According to official figures, gross foreign exchange reserves are currently $ 51.46 billion.

We believe that the pressure on the lira may increase further in the short term for the above reasons, an unidentified Turkish currency trader Al Jazeera told. According to the finance minister, the country’s foreign exchange reserves are large, but experts are less and less convinced of this.

We are already halfway through a currency crisis

Cristian Maggio, emerging markets specialist at TD Securities, described the situation. He added that reserves are still sufficient now, but the Turkish central bank is burning them faster than any other emerging market country.

Analysts say the decline in reserves is mainly due to interventions trying to stabilize the lira. Meanwhile, Turkey faces some $ 170 billion in external debt financing this year.

Meanwhile, Turkish authorities once again suspect some investors of a manipulative attack and threaten to sue, further worsening the mood in the market.

The Turkish leadership appears to be trying to dominate and intimidate the market and analysts rather than giving real economic policy responses to the problems.

said Timothy Ash, a BlueBay Asset Management specialist. According to him, the market considers that Turkish monetary policy is less and less credible, when interest rates should rise to protect the lira, the central bank does not do it, or very slowly. Incidentally, this is due in part to political pressure, President Recep Tayyip Erdogan has been “fighting” for low interest rates for years and putting pressure on the central bank.

The coronavirus is still raging.

This is exacerbated by the coronavirus, which continues to be a serious problem in Turkey, with almost 140,000 infections and 4,000 registered deaths. A few weeks ago, the situation seemed even worse, and the epidemic seems to have calmed down lately in the Turks.

As a result, Turkish authorities have been slow to ease the restrictions so far, and President Erdogan announced earlier this week that the travel ban will be lifted in seven provinces and restrictions on young and old will be phased out. Malls could also open starting next week, and teaching would continue at universities in mid-June.

The economy is also slowly restarting, with all the major factories in the country starting production starting Monday. However, some epidemiologists say the Turkish government has gone too fast to lift the restrictions. And if the epidemic breaks out again in the country, it could also put additional pressure on the economy and the lira.

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