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.