Lira extends retreat as Turkey heads toward a financial crisis

[SYDNEY] Turkey's lira extended its precipitous slide on Monday after the nation's president showed no signs of backing down in a standoff with the US.

The lira weakened past 7.23 per US dollar in early Asian hours before paring losses after the nation's Banking Regulation and Supervision Agency stepped in to limit swap transactions on the battered currency. Treasury and Finance Minister Berat Albayrak said the nation will announce steps to calm markets on Monday, Hurriyet newspaper reported.

The reported measures "have evidently had some impact in pulling the lira back higher," said Ray Attrill, head of foreign exchange strategy at National Australia Bank Ltd. in Sydney. Still, "there's nothing as yet to suggest that the government, or Turkish central bank, is poised to announce the fiscal or monetary policy measures capable of quickly restoring confidence in Turkey."

The Turkish currency has been a casualty of a deepening crisis spurred by the administration's growth-at-all-costs agenda and a worsening spat with the US, which sanctioned Turkey over the detention of an American priest. The lira's plunge to a record low and fears of a contagion sparked tremors through global markets, dragging a gauge for emerging-market currencies down on Friday to the lowest in more than a year.

Bloomberg price data showed the dollar climbed as much as 13 per cent to 7.2362 against the lira, with some banks said to avoid providing two-way prices amid unprecedented volatility. The lira, down more than 40 per cent this year, was quoted at 6.8242 per dollar at 9:09am in Tokyo.

The extended rout in the lira helped weigh on the euro and spurred haven currencies higher in early Asia trading. The euro declined 0.4 per cent against the yen. Australia's dollar fell 0.2 per cent against the dollar, pulling back from a drop of as much as 0.7 per cent.

"It's still the case that the euro and Australian dollar are most readily in the firing line, given concerns over euro zone exposure to Turkey and the Aussie's status as the market's preferred EM/risk proxy," NAB's Attrill said of the impact of the falling lira on Group-of-10 currencies.

The sell-off also represents a vote of no-confidence in a new system of government that earlier this year handed President Recep Tayyip Erdogan unrivaled authority, essentially paralyzing the bureaucracy in Ankara. In speeches on Sunday, Mr Erdogan remained defiant, vowing never to give in on interest-rate hikes. He also ruled out an agreement with the International Monetary Fund.

RUNAWAY INFLATION

Years of a growth-at-all-costs policy bias have left Turkey's companies saddled with hundreds of billions of dollars in foreign debt, runaway inflation and one of the world's largest current-account deficits.

"Rate hikes would not be enough, with Turkish officials needing to create a credibility shock," Guillaume Tresca, senior emerging market strategist at Credit Agricole CIB, wrote in a Aug 10 note. "A complete rebalancing of the economy is needed, with a new economic team and a real commitment to the central bank's independence."

Turkey's central bank - which has raised its main policy rate to 17.75 per cent - unexpectedly refrained from a further hike at its last meeting.

"Turkey's problems will continue to mount in the face of excessively loose monetary and fiscal policy," Capital Economics senior markets economist John Higgins wrote in an Aug 11 note.

Turkey's government debt plummeted on Friday, driving the yield on 10-year debt to a record close of 22.11 per cent. Five-year credit-default swaps - the cost to insure the bonds against default - climbed 75 basis points to 453 basis points on Friday evening in New York, the highest level since March 2009, CMA data showed.

BLOOMBERG