How much time does massive central bank currency intervention buy? About a day at a time in Turkey’s case. It spent $1.3 billion of its reserves yesterday to stop the lira going into freefall having thrown a record $2.25 billion at the market on Monday.
So far this year, the central bank has burned over $6 billion of its reserves which have now dropped below $40 billion. So that can’t go on for long, meaning an interest rate rise which a slowing economy really doesn’t need must be on the cards. The lira hit a record low versus the dollar on Monday.
Much of this is to do with the global emerging market sell-off sparked by the Federal Reserve’s exit plan from money-printing but Ankara has sown the seeds of crisis too, first with the very public standoff with protesters in its main cities who railed against what they see as Prime Minister Tayyip Erdogan’s increasingly authoritarian rule.
Erdogan has come out fighting, blaming “foreign circles”, and an “interest rate lobby”, foreign media and terrorists for Turkey’s problems – not the sort of language likely to encourage foreign investors. It also means the if rates do rise, Erdogan is probably going to have to blame someone.
Yesterday, the banking watchdog launched an investigation into recent foreign exchange deals. Justified or not, that could well scare the horses too. Then, there is the already yawning current account deficit which leaves the economy acutely vulnerable to investment outflows. So Turkey is at the centre of the emerging market storm, partly due to its own actions, and it’s not clear the government is going to change tack.
German Bund futures have risen after minutes of the Fed’s last meeting showed chairman Ben Bernanke saw easy policy for the foreseeable future, while about half his colleagues thought a halt to QE should be called by the year-end. Bernanke has said that is more likely by mid-2014.
In the round, markets are taking that as a more dovish stance (?). European stock futures are pointing substantially higher.
Italy will sell up to 6.5 billion euros of fixed rate bonds and floating rate certificates after one-year borrowing costs rose to their highest since March at a one-year debt sale on Wednesday.
A ratings cut by S&P on Tuesday gives an unhelpful backdrop. The ratings agency’s forecast of a deeper economic downturn this year – with the pressure that will put on the deficit – is in line with the IMF and most other forecasters. With the government at odds over issues ranging from demands to cut an unpopular housing tax, to an order for F-35 combat jets and the legal problems of centre-right leader Silvio Berlusconi, prospects of concerted political support for reform appear weak.
ECB policymakers Benoit Coeure and Jens Weidmann are both speaking and their words will be parsed for any more clarity on what keeping interest rates at record lows for an “extended period” actually means. Executive Board member Joerg Asmussen told Reuters on Tuesday that the pledge was good for “beyond” 12 months but the ECB then rushed out a statement insisting he had had not intended to give any guidance on exact time frames.
Since Draghi announced “forward guidance” a week ago there have been shades of mixed messages from his colleagues which shows just how difficult it is. Coeure has already said the ECB stands ready to act flexibly to new developments while Weidmann has stuck to his line that monetary policy can only do so much. There is an element of smoke and mirrors here. In the end, if growth and inflation start rising, the ECB will tighten policy, regardless of timelines. ‘Twas ever thus.
ECB reaction to yesterday’s messy banking union developments will also be interesting. The European Commission proposed a cross-border agency to salvage or shut failing banks which, because it will have no funds for some time, suggests it will find it very difficult actually to demand the closure of any bank, no matter how stricken, because the bill will fall squarely on the home government. Ergo, the “doom loop” created by weak sovereigns propping up weaker banks is utterly unbroken.
However, even that was too much for Germany which demanded again that such decisions should rest squarely with member states, not an overarching body. The ECB is likely to take over its supervisory role late next year. It does not want to be exposed without parallel structures in place. European Commission President Jose Manuel Barroso is in Warsaw and may have something to say too.