Talking Turkey

March 11, 2015

Turkey's President Tayyip Erdogan arrives for a welcoming ceremony at the Presidential Palace in Ankara

Turkish Central Bank Governor Erdem Basci will brief President Tayyip Erdogan today about sharp falls in the lira of about 12 percent versus the dollar this year which have not been helped by Erdogan’s criticism of monetary policy.

Deputy Prime Minister Ali Babacan, Finance Minister Mehmet Simsek and Basci met investors in New York last week in an effort to allay concerns about the persistent weakness of the currency and central bank independence.

That is no easy task given Erdogan and other ministers have railed against the central bank for not cutting rates sharply enough with the president even going as far as saying anyone opposing interest rates cuts was guilty of treason and insisting that lower rates would lower the level of inflation rather than raise it.

Given the tumble in the currency, most central banks would be looking to raise rates at this juncture. Yesterday, the central bank said it would adjust its reserve requirements, used to control the amount of dollars in the market, to temporarily boost foreign exchange liquidity. The lira continued heading south.

Rumours have proliferated about the futures of Basci and Babacan, who has been a staunch defender of central bank independence. The crunch will come after parliamentary elections in June when Erdogan might move out those who he sees as not on board as he pursues the network of U.S.-based cleric Fethullah Gulen, whom he accuses of plotting against him through influence in state institutions.

The International Monetary Fund’s board is due to approve Ukraine’s programme later today after Kiev passed a new draft budget last week to help it clinch the deal. It is built on some daring assumptions.

The Fund announced a preliminary agreement for a new $17.5 billion, four-year loan programme for Ukraine last month, augmented by pledges from the World Bank, the United States, the European Union and other countries.

Both the IMF and Kiev assume some $15 billion will be able to be recouped from holders of Ukrainian sovereign bonds, which is necessary to ensure Ukraine’s debt can fall to a “sustainable” 70 percent of GDP by 2020. The IMF cannot lend to countries unless it believes they will be able to pay back eventually. Talks with private creditors have yet to commence.

A senior U.S. State Department official said last night that Russian tanks and heavy military equipment had crossed the Ukrainian border in the last few days in breach of a ceasefire agreed last month.

European Central Bank President Mario Draghi and several of his colleagues speak at a Frankfurt conference focused on quantitative easing as the money-printing programme enters its third day.

Despite doubts about finding enough bonds to buy, the ECB may have got lucky, launching into QE just as the euro zone economy shows signs of life and banks start increasing lending to businesses and households – increasing the chances that it will succeed in helping to boost growth and inflation.

A falling euro – prompted by the ECB creating a larger supply of the common currency while strong U.S. data drives expectations of an interest rate rise there – should also boost exports and inflation via higher import prices. The euro has sunk to a 12-year low below $1.07, down from a peak of nearly $1.40 in the middle of last year.

There is a real question about whether this policy setting is appropriate for Germany, by far the bloc’s largest economy, if its recovery continues at its current pace. Because of the relative size of Germany, more of its bonds will be bought than anybody else’s.

Draghi is also due to have lunch in Paris with French President Hollande, a consistent proponent of prioritising growth over debt-cutting.

Greek officials begin technical talks with the country’s European Commission, ECB and IMF creditors today.

The Eurogroup of euro zone finance ministers urged Greece on Monday to “stop wasting time” and buckle down to serious talks on implementing a reform programme to secure urgently needed funds. No money will flow until that programme is agreed and clearly being implemented. The issue is starting to weigh on markets, at the margin, again.

Greece will auction 1.0 billion euros of three-month Treasury bills to refinance a maturing issue. Athens is scrambling to meet this month’s funding needs, which include maturing Treasury paper and a 1.5-billion-euro loan payment to the IMF.

Issuing T-bills is its only source of commercial borrowing. The ECB made clear last week that it would not raise the limit on Greece’s issuance of short-term debt. Sources told us that the government is set to tap into more than half a billion euros of funds sitting in the country’s bank rescue fund.

Swedish inflation data for February will be closely watched after the Riksbank launched into QE and pushed interest rates into negative territory. The rate is predicted to edge back up to zero. A downside surprise would push the central bank towards further action.

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