Desperate measures are in the air in Turkey: trading rooms are awash with talk of a bailout by the International Monetary Fund and potential capital controls. But there’s a vacuum at the core.
The central bank and government have been largely silent as the currency plummeted to record lows and the U.S. imposed sanctions and threatened more. The lira fell by the most in a decade on Monday, the yield on benchmark 10-year government notes has surged to an all-time high and the Borsa Istanbul 100 Index is sinking.
Yet the radio silence from Ankara -- a result of June elections that gave President Recep Tayyip Erdogan almost absolute power in policy making -- is deafening. Erdogan is a staunch critic of higher rates and investors worry that he may be standing in the way of any further rate increases.
Buckling Lira
The lira is buckling under the weight of one of the widest current-account deficits in emerging markets and inflation is spiraling ever higher. As of July it was running at more than three times the central bank’s target, driving the real policy rate to below 2 percent, the lowest since December.
The lira on Tuesday rebounded about 1 percent after sinking as much as 6.7 percent to the dollar Monday; it traded at 5.26 at 10:30 a.m. in London, down about 28 percent so far this year. Ten-year yields neared 20 percent, while the benchmark stock index was up 1 percent, narrowing its year-to-date loss in dollar terms to about 40 percent.
