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The Turkish lira fell at the start of trade, added to a recent slide and was the lowest ever after the chill in relations with the United States and the new head of the central bank indicated that rising interest rates would hurt the economy.
The currency, among the worst performers in emerging markets this year, touched 8,425 on Monday against the dollar, close to the 2021 low water mark and the 8.58 record set in early November.
“The negativity of the market is intense. There is a high risk of an episode to be (unfortunately) overcome, ”said Robin Brooks, chief economist at the International Institute of Finance.
The lira has dropped 3.5 percent in the last three trading days, as it became clear that U.S. President Joe Biden would officially recognize the 1915 assassinations and deportations of Armenians in the Ottoman Empire as genocide.
Turkey, a U.S. ally of NATO, strongly criticized Saturday’s decision to undermine the White House’s decision, trust and friendship.
Turkish assets are particularly sensitive to tensions over relations with Washington over falling US sanctions and economic threats, including the 2018 lira crisis with then-President Donald Trump that led to the lira crisis and recession.
President Recep Tayyip Erdogan’s spokesman and adviser Ibrahim Kalin told Reuters that Washington should act responsibly because no one had an interest in “artificially damaging ongoing relations for tight political agendas.”
“Everything we do with the United States will be under this very unfortunate statement,” he said in an interview on Sunday.
Adding investor concerns, Turkish Central Bank Governor Sahap Kavcioglu, who was appointed a month ago, said late Friday that while maintaining tight monetary policy, for now, any rate hike would send a bad message to the real economy.
“Who’s happy with high interest rates?” he said in his first televised interview as head of the bank.
Rate reductions?
The lira has been down in the last six straight trading days.
Erdogan last month appointed Naci Agbal, a respected political falcon, removed from office and dropped to 15 percent as central bank governor and appointed Kavcioglu, who, like Erdogan, is critical of a tight monetary policy and has defended an unusual approach to inflation. .
Agbal raised the central bank’s benchmark policy interest rate to a 19% rise to more than 16 per cent and reduce inflation to 18%. Many foreign investors who acquired Turkish assets under Agbal’s command sold them when they were released.
Analysts expect the central bank to start cutting rates by half a year and some predict Kavcioglu could return to an expensive policy before appointing Agbal in November to help the lira sell foreign currency (FX) reserves.
Political opposition has put pressure on Erdogan and his government’s AK Party in 2019 and 2020 on $ 128 billion in FX sales, backed by state-owned banks and central bank exchanges, significantly depleting FX reserves.
In the interview, Kavcioglu defended the sales in the face of what he called the “attacks” that began with the 2018 crisis.
The amortization of the lira could have gone out of control and the costs of borrowing would have risen if the authorities had not intervened last year, Kavcioglu said.
“You have to fill out last year’s FX order,” Kavcioglu said. “If not, Turkey would have to face the consequences.” He mentioned the failures of companies in the financial crisis 20 years ago to show how bad things could be.
Reducing reservations
Opposition parties have blamed Berat Albayra, Erdogan’s son-in-law, for more than two years as Minister of Finance and Finance until he resigned in November.
Kavcioglu said the reserve policies being used since 2017 meant that the protocol signed between the central bank and the Treasury allowed for ill-advised foreign divisions.
Turkey’s gross reserves, including gold and money held by the central bank on behalf of commercial lenders, have fallen by more than 15 percent since early 2020 to $ 89.3 billion in April. Net international reserves fell more than 75 percent to $ 9.9 billion, while money borrowed from banks through short-term swaps reached $ 10 billion.
Excluding exchanges, net reserves would fall below zero, according to estimates by the Bloomberg news agency.
Kavcioglu “was pretty confident in the quality of the reserves, saying that (they) only changed from assets to liabilities,” said Ozlem Derici, a founding partner at Sinnul Spinn Consulting. But “the loss of assets and accountability remains a relatively fragile system in the face of a bank-like situation where households and businesses need FX deposits,” he said.
Erdogan has fired three central bank chiefs in two years and eroded money credibility among foreign investors.
The move by Biden on Saturday fulfilled the promise of a 2020 campaign for Armenian-American Democrats, but Turkey risks pushing further into Russian orbit.
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