- The Central Bank of the Republic of Turkey (TCMB) has outlined a range of measures to bolster liquidity and support the financial system.
- The lira plunged as much as 10 per cent during the Asian markets trading session after a fall of 25 per cent against the US dollar last week — moves that rattled markets around the world.
- Analysts and eurozone financial regulators are concerned about the potential for the weakening lira to cause problems for banks in Turkey, as well as for major lenders in Spain and France.
- In a statement released today, the TCMB said it would take “all necessary measures” to maintain financial stability.
- The Turkish lira climbed off its session lows in Asia but remains volatile.
The Central Bank of the Republic of Turkey (TCMB) has pledged to maintain stability in the financial system, which is teetering on the brink of a crisis amid a rapid depreciation in the lira.
The Turkish currency plunged 25 per cent against the US dollar last week, with most of that depreciation happening on Friday amid escalating tensions with the Trump administration and market uncertainty about the ability of President Recep Tayyip Erdogan to manage the mounting problems in the Turkish economy.
When trade opened in Asia on Monday the lira immediately plummeted another 10 per cent and swung wildly through the session. It started to gain back ground on the TCMB statement.
“The Central Bank will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary,” the TCMB said.
Turkish banks will be allowed to borrow foreign exchange deposits in one-month maturities, in addition to one-week maturities.
Banks’ FX deposit limits may also be raised, and the TCMB will resume its intermediary function in the FX deposit to provide an extra level of support.
“In the framework of intra-day and overnight standing facilities, the Central Bank will provide all the liquidity the banks need,” the TCMB said.
The central bank will also, if necessary, hold more than one so-called “repo auction”, usually a one-off daily event where banks buy and sell short-term government-backed securities — a crucial instrument for short-term liquidity — in the market.
Separately, the TCMB said it would reduce the reserve requirement ratio (RRR) by 400 basis (4%) points for foreign exchange liabilities held by Turkish banks.
Reducing the amount of collateral assets that banks are required to hold in reserve is another measure aimed at freeing up short-term liquidity for Turkey’s financial institutions.
The problems facing Turkey’s economy are complex, with GDP growth running strong and fiscal policy loose. Erdogan, who has been increasing his control over economic policy, has indicated that he is opposed to interest rate increases, a typical tool for central banks whose currencies are sliding.
Kerry Craig, global markets strategist at J.P. Morgan Asset Management, said: “The decline in the Lira is multifaceted, caused not only by a weak external position in terms of current account deficit and inadequate currency reserves, but also the challenging political environment which exacerbates the vulnerabilities in the Lira. A mid-meeting rate hike and tightening of monetary policy may help to avert the Lira’s decline, to some extent.
While there is concern that the crisis for the lira could spread to other emerging market currencies, Craig said the drivers of the lira’s decline were “very specific to Turkey”.
“Currencies have been discerning this year in how they have behaved based on external positions. The big declines in the Lira, the Rand, and the Argentine Peso have not been mirrored in many Asian currencies given the smaller current account deficits (or even surpluses). This is reassuring in that the market is differentiating between the strong and the weak,” Craig said.
The Turkish lira strengthened off its lows during the Asian trading session, but price action for the currency has remained volatile.
A short time ago the lira was falling back towards 7 against the US dollar, having briefly strengthened to below 6.5:
The volatility in the lira has started to spill into other emerging markets (EM). Shares in Asian EM markets including China, Indonesia and the Phillipines have all lost ground.
The South African rand initially fell by 10% against the USD, but has pared back losses and a short time ago was down 2.5%.
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