Turkey's half-hearted bowing to the inevitable .....

ref :- "Currency crisis worsens Erdogan siege mentality" , The Financial Times, International Section

What exactly constitutes a "currency crisis" ?  Mmmm...... a good question and to be frank we're not sure that there is a simple definition. Whatever the answer is though, we're pretty sure that a 20%+ fall in value in less than a month would qualify, particularly if the relevant powers-that-be seem determined to ignore the most basic economic principles and blame everybody else for their problems.

So it is with Turkey ..... A very charitable view on things would be that Turkey is a victim of its own success, but of course that would ignore the fact that the consequences of Turkey's massively pro-growth policies were predictable and demanded action some time ago. An overheated economy stoked a huge current account deficit, magnified by an almost total reliance on ever more expensive imported oil, and most vividly demonstrated by sharply climbing inflation (nearly 11%). The same policies encouraged a torrent of outside investment into Turkey, and the country gorged itself on foreign debt. Now, with a tumbling Turkish Lira and rates on the up elsewhere (particularly in the US), alongside Argentina and perhaps Indonesia, Turkey has become the epitome of an emerging market nation struggling to cope with all the problems that sector is currently facing.

For currency traders, out-of-control inflation is a big NO-NO. The obvious antidote to inflationary problems is to jack up interest rates. You'll often see traders start to buy a beleaguered currency in expectation of such a move that not only tackles inflation but plainly makes investment in that currency more attractive.

The problem for Turkey however is that President Erdogan has a pathological hatred of interest rates, and of high ones in particular. That wouldn't be quite such a big deal if the country's central bank conducted monetary policy independently .... that is to say, without political influence. But nobody can really believe that there are any institutions left in Turkey with that kind of independence, can they ? Mr Erdogan's influence has been pretty plain as officials have ignored the escalating crisis, and to make the picture even clearer he has stated publicly that he intends to take a firmer grip on monetary policy should he win the snap election he has called for June 24th.

The markets would take a dim view of such a move from any leader in any nation, but coming from a man who only recently horrified and astounded investors by claiming that the way to lower inflation was to LOWER interest rates it was pure poison for the Lira. To refer back to what we were saying earlier, you could very easily take a less charitable view and say that the problems facing Turkey and its currency are very largely of its own making, most obviously demonstrated by official inaction over monetary policy and some truly weird opinions on the subject by those who really hold the reins. Ironic really, since Mr Erdogan used to claim to be a champion of central bank independence.

You wouldn't expect the authorities in Ankara to see things that way, of course. They would maintain that the blame for the Lira's dramatic fall should be aimed at Mr Erdogan's "enemies", who are trying to undermine his chances at the general election. Mr Erdogan and his government (regime ?) are exhibiting the same kind of paranoia that has induced him to jail judges, journalists and political opponents. To label the President as merely"autocratic" is fast becoming an understatement, and to make matters worse for the country as well as for its currency, he has surrounded himself with cronies (sorry, advisors) unlikely to contradict the President on financial matters or anything else. One member of his economic team voiced the opinion that Mr Erdogan's enemies were trying to kill him via telekinesis ..... which is fascinating of course but not necessarily calculated to restore the faith of the markets.

ANYWAY .....

Yesterday, whoever it is that ultimately makes the decisions (as we say, not necessarily the governor of the central bank) was finally forced to bite the bullet. The Lira had dropped another 5% in value in morning trading, pushed out to TRY 4.90 versus the US dollar, and enough was plainly enough. Via the mechanism through which the central bank lends to banks at the end of the day, interest rates were hiked by 3% to 16.5 %. Sure enough, the US Dollar versus the Turkish Lira (USD / TRY) snapped into 4.54, a pretty stunning reverse and quite a painful one for those speculators selling the Lira short.

The thing is though, we were a little unsure at the time whether 3% was actually enough .... certainly all the talking heads over the preceding hours and days had been saying that the run on the lira had got so bad that nothing less than a 4% hike would do. This morning we're still not sure, and since USD / TRY has tumbled back out to 4.75, it seems that we may not be alone. Time will tell .... though we will make one prediction with total confidence and with little fear of contradiction : Mr Erdogan will WIN the general election ..... convincingly. He has made the paying field so "un-level" that even in this era of political shocks, an upset is impossible.