Trading rooms are awash with talk of a bailout of the Turkish economy by the International Monetary Fund (IMF) and potential capital controls, Bloomberg reported on Tuesday, adding that while desperate measures are in the air in Turkey, there is a vacuum at the core of economic policy making.
The central bank and government have remained largely silent as the currency plummeted to record lows and the US imposed sanctions and threatened more. The lira rebounded after falling by the most in a decade on Monday, getting a lift from news that Turkish officials were headed to Washington for talks. The yield on 10-year bonds surged above 20 percent to an all-time high.
The US sanctioned two Turkish ministers over a court decision to put American pastor Andrew Brunson under house arrest after almost two years of pretrial detention on “terrorism” charges.
Capital controls have “become more than a tail-risk scenario now as the authorities show no signs of reverting to more orthodox policies,” said Shamaila Khan, AllianceBernstein’s director of emerging market debt in New York. But what the lira really needs is “independence of the central bank, tighter fiscal policies and an IMF program.”
“It is very difficult to foresee an about-face by the authorities,” said Per Hammarlund, chief emerging market strategist at SEB in Stockholm. “The moment when Turkey will be forced to go to the IMF for support is drawing closer.”
The lira was 1.4 percent stronger at 5.25 per dollar at 5:30 p.m. in Istanbul after sinking as much as 6.7 percent to the dollar on Monday, taking the currency’s slide to 28 percent so far this year. Ten-year yields fell 18 basis points after earlier surging as much 42 basis points to a record 20.09 percent; the benchmark stock index was up about 2 percent, narrowing its year-to-date loss in dollar terms to about 40 percent.
Although investors are pushing for a significant rate increase from the central bank, there is growing consensus it is going to take more than monetary policy to reverse the tide.
“It’s going to be a shock of one type or another: either a policy shock or a macro shock or some combination of the two,” said Christopher Granville, managing director for EMEA and global political research at TS Lombard in London. “But the way to sugar that pill,” he said, would be a “political accommodation with the West. That would make the pain much less.”
A further drop in the Turkish lira to 7.1 versus the dollar could largely erode the country’s banks’ excess capital, investment bank Goldman Sachs has warned, according to Reuters.
A note from the bank’s analysts estimated that every 10 percent drop in the lira impacts banks’ capital levels by 50 basis points on average.
They calculated that the 12 percent slump in the currency since the end of June had left Yapı Kredi with the weakest capital levels of all the main Turkish banks, having also wiped out the remaining benefit of a recent rights issue.
Garanti and Akbank, meanwhile, looked better placed relative to peers they added.
“Incremental lira depreciation could increase capital concerns for banks, especially for ones with lower capital levels,” Goldman’s analysts said.