Turkey promises plan to calm markets

Turkey’s finance minister promised a plan to calm the markets would be unveiled on Monday morning as the Turkish lira hit a record low and investors called for drastic action to avert a deeper crisis.

In an interview with the Turkish newspaper Hurriyet published on Sunday night, Berat Albayrak said that “precaution and action plans” were ready after the Turkish lira went into freefall last week.

“From Monday morning, our institutions will take the necessary actions with the aim of calming the markets and will share the necessary announcements with the markets,” he said.

Mr Albayrak’s comments — and an announcement by the country’s banking regulator that it would limit swaps transactions — came after the beleaguered currency fell as much as 10 per cent to a new record low of 7.2362 to the dollar at the start of Asia trading on Monday before recovering slightly to hover at 6.74 by midday in Hong Kong.

The slide came despite a series of defiant speeches by President Recep Tayyip Erdogan over the weekend, in which he railed against high interest rates and described the currency’s plunge as a foreign “operation”.

But investors and analysts warned that dramatic action was needed to avert further damage. “For the second day in a row the [lira] is under severe pressure following Erdogan’s defiant tone over the weekend,” wrote Jason Daw, head of emerging markets strategy at Société Générale in a note to clients. “Bold policy action is needed and clearly the market is unimpressed.”

Mr Albayrak, who is the son-in-law of Mr Erdogan, said that a plan had been prepared for banks and the real economy, including the small to mid-sized businesses he said had been worst hit by currency fluctuations. “We will be taking the necessary steps with our banks and banking watchdog in a speedy manner,” he said.

He also dismissed rumours that Ankara could impose capital controls with a promise that Turkey would not convert or seize foreign currency deposits. Mr Albayrak added that the government could implement a fiscal rule, which would constrain government spending “if necessary”.

Tim Ash, an emerging markets strategist at BlueBay Asset Management, welcomed the promise of a plan but urged Turkish officials to announce it as soon as possible. “They are just always behind the curve, always catching up, always too late, and then the damage is done,” he said. “Text book stuff of how not to manage a crisis.”

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The Turkish lira lost a fifth of its value against the dollar last week on the back of an escalating dispute with US President Donald Trump and concerns about the government’s management of the Turkish economy.

The plunging currency, down more than 40 per cent since the start of the year, has piled stress on Turkish companies that are saddled with unhedged dollar- and euro-denominated debt and raised fears that the country will struggle to meet its large external financing needs.

The impact of Turkey’s crisis on the banking system, both domestically and across Europe, has prompted alarm among investors, with analysts worrying that the start of the trading week would see stocks joining the lira under renewed pressure.

Speaking on Sunday, Mr Erdogan accused other countries of mounting an “operation” to bring down the Turkish economy and gave no indication he would meet investor demands for an emergency plan.

“What is the cause of this storm?” he asked a gathering of ruling party officials in the Black Sea city of Trabzon. “There is no economic reason . . . It’s an operation against Turkey.”

His language was echoed by Mr Albayrak, who said that the state of the currency “cannot be explained by economic data”. He added: “This is an indicator of a clear attack. This attack by the biggest player of the global financial system will cause the same effects in all emerging markets.”

Mr Erdogan underlined his hostility to high interest rates, claiming they make “the rich richer and the poor poorer”. The refusal of Turkey’s central bank to raise rates despite soaring inflation and the currency moves is widely viewed among investors as the result of political pressure from Mr Erdogan, and has stoked concern that the Turkish economy is heading for a hard landing.

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For the third day running, the Turkish president urged Turks to take dollars, euros and gold kept under their pillows and convert it to lira to prop up the currency, which fell in the wake of Mr Trump saying the US would double tariffs on imports of Turkish aluminium and steel.

The US move was the latest salvo in an escalating dispute over the detention of Andrew Brunson, an evangelical pastor whose fate has become the lightning rod for a host of disputes between the two Nato allies.

Mr Erdogan said on Sunday that the US had set a deadline of 6pm on Wednesday for the release of Mr Brunson, who was moved to house arrest at the end of last month after almost two years in prison on espionage and terrorism charges. The ultimatum has not been confirmed by Washington.

The Turkish president appeared relaxed as he spoke at several events, reciting poetry and joking as he addressed ruling party officials and supporters.

Although many analysts see Turkey’s crisis as largely self-inflicted, they say that it has been exacerbated by the shifting global monetary environment, with the US Federal Reserve lifting rates and trimming its balance sheet. That hurts countries that depend on short-term dollar funding, according to Joachim Fels, global economic adviser at Pimco.

“This looks like yet another example of how a combination of bad domestic economic policies turning worse and deteriorating global liquidity that makes bloated dollar-funded balance sheets vulnerable can produce high volatility and contagion,” Mr Fels wrote in a note to clients on Sunday.

“Who said shrinking the Fed’s balance sheet and raising the funds rate in a gradual fashion wouldn’t have global repercussions?”