Turkey’s borrowing costs skyrocket as crisis enters new phase

ISTANBUL — Turkey’s financial strains have worsened and the country’s business community has revolted, a sign that the currency crisis weighing on the economy is heading into a dangerous new phase.

The pound plunged nearly 9% percent on Monday to over 17.86 against the dollar, a record low, after President Recep Tayyip Erdogan pledged to cut interest rates further in defiance of the chiefs. company who have spoken out against the government’s monetary policy in recent days.

The lira’s dizzying drop amplifies concerns among investors and economists that Turkey’s heavily dollarized financial system could be heading for a banking crisis. The pound has lost more than half of its value this year, wiping out much of Turks’ economies and sparking sporadic protests.

“A huge crisis, a financial crisis and so on, it’s all possible, but we don’t know what the timeline is.” said Mustafa Sönmez, a Turkish economist.

After the Turkish markets closed, Erdogan said the government would introduce a new program to protect lira deposits against currency fluctuations. It was not clear how this program would work or how it would be paid.

The Turkish lira appreciated against the dollar, offsetting earlier losses.

Of particular concern earlier on Monday was Turkey’s rising costs of borrowing in US dollars.

Yields on Turkish bonds denominated in US dollars rose on Monday as investors sold their holdings.

The yield on a billion Turkish dollar bond maturing in March 2022 rose to 7.3% on Monday, from 5.4% on Friday and from 3.1% at the start of the year, according to Tradeweb..

The yield on a $ 2.25 billion Turkish dollar bond maturing in January 2031 climbed to 8.26% on Monday from 7.8% on Friday.

While Turkey is a modest issuer of US dollar bonds, much of the issuance is held by Turkish banks, and rising borrowing costs may reflect the financial system’s difficulty in securing the dollars demanded by depositors or to repay debts.

As the Federal Reserve and other central banks around the world face rising inflation amid the economic recovery from the pandemic, Turkey – where the rate is currently above 20% – is warning . Soaring inflation has caused economic turmoil after years of strong growth. Photo: Sedat Suna / Shutterstock

More than half of Turkey’s bank deposits are in foreign currency, according to central bank data. Turkish banks have in the past loaned foreign currency to the central bank, which it sold to stabilize the lira. A sudden rush by Turkish savers and businesses to redeem foreign currency deposits or move them out of the country could cause the financial system to slip.

The central bank intervened five times this month to stem the pound’s rate of decline, burning off already low currency reserves. Economists believe Turkey’s central bank has more foreign currency liabilities than assets.

The drastic drop in the pound, low foreign exchange reserves and concerns about financial stability could also prompt some holders of foreign bonds to sell.

“They are burning what they have left in the reserves. It’s money you can’t use to pay off debt, ”said Daniel Wood, portfolio manager at William Blair Investment Management.

Demonstrators gathered in Istanbul on Sunday to protest economic policies.


Photo:

UMIT BEKTAS / REUTERS

The Turkish stock market was twice forced to stop trading on Monday to avoid further losses. Investors and ordinary Turks alike rushed to swap the lira for other currencies and gold during the crisis.

The collapse of the pound is the result of four interest rate cuts in the past four months, all demanded by Erdogan, according to economists. After sacking a slew of central bank governors and senior finance officials, Erdogan pressured the bank to cut rates despite rising inflation.

“They keep saying we’re cutting prices. Don’t expect anything else from me. As a Muslim, I will continue to do whatever God’s words require, ”Erdogan said on Sunday.

Mr Erdogan has repeatedly cited his religious objections to high interest rates as well as an economic view that calls for a depreciated pound to encourage exports and productive industry.

Mr Erdogan’s comments were aimed at bolstering support for his conservative religious base in Turkey after months in which his ratings fell in opinion polls due to the economic crisis, analysts said.

“His aim is to consolidate his supporters by saying that he is a leader, very determined and very religious,” Sönmez said.

Tensions are mounting between the government and Turkey’s normally politically calm business community.

The country’s largest trade association, TUSIAD, said over the weekend that Erdogan’s agenda was putting the economy as a whole at risk. The group’s chairman also blamed the government for rapid inflation and the implosion of purchasing power.

“An environment of mistrust and instability has been created,” the organization said. “Even exports, which are expected to benefit the most, have been affected in this environment,” he said.

Mr Erdogan hit back at the industry group in his speech on Sunday.

“I’m speaking to you. You only have one job and that is investment, jobs and growth. Don’t try to look for different ways and versions to attack the government,” a- he said, addressing the group directly.

Another measure of concern about Turkey’s economic policy is the skyrocketing costs of insurance against possible default.

The cost of default insurance on $ 10,000 of five-year Turkish dollar-denominated bonds using derivative contracts called credit default swaps climbed to about $ 584 per year on Monday, from about $ 380 per year late June, according to FactSet.

Write to Jared Malsin at [email protected] and Caitlin Ostroff at [email protected]

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