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Abu Dhabi, UAETuesday 25 September 2018

Turkish Central Bank steps in to ease liquidity as lira’s wild ride continues

Turkey’s regulator introduced a range of measures to manage liquidity and restore stability in financial markets

The Turkish lira has plunged the country into financial crisis, the reverberations of which are being felt across emerging markets. Reuters
The Turkish lira has plunged the country into financial crisis, the reverberations of which are being felt across emerging markets. Reuters

Turkey’s Central Bank introduced a range of measures in the hope of managing liquidity and restoring stability to financial markets as the Turkish lira continued its white-knuckle ride and fears of contagion put pressure on the Euro and other emerging market currencies.

In the first move on Monday to reassure the markets and to limit the damage from the fall of lira, the Ankara-based regulator said it will “take all necessary measure” and eased rules that govern how commercial banks in the country manage their lira and foreign currency liquidity.

“In the framework of intraday and overnight standing facilities, the central bank will provide all the liquidity the banks need,” the regulator said in a statement early Monday. “Discount rates for collaterals against Turkish lira transactions will be revised based on type and maturity, thus providing banks with flexibility in their collateral management”.

In terms of the foreign exchange liquidity management, lenders, among other measures, will be able to borrow FX deposits in one-month maturity in addition to one-week maturity as the Central Bank will “closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability,” the regulator noted.

The revised policies of the Turkish central bank will bring about 10 billion liras ($1.5bn), $6bn, and $3bn equivalent of gold liquidity to the financial system, the central bank said in a separate statement posted on its website.

The Turkish currency plunged for the fourth consecutive day during early Asian trade on Monday. The currency has lost about a quarter of its value against the dollar since the US spat with President Recep Tayyip Erdogan’s government over the continued detention of an American pastor worsened last week. The fall out has showed no signs of abating as US president Donald Trump approved doubling tariffs on Turkish steel and aluminum while Mr Erdogan has vowed to retaliate. The escalation has dented investor confidence in the Middle East’s largest economy as a threat of a full-blown financial crisis looms large over Turkey.

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“The plunge in the lira “now looks likely to push the Turkish economy into crisis mode", James Cheo, Bank of Singapore’s senior investment strategist said on Monday. The sliding currency, down more than 40 per cent since the start of the year, "has piled stress on Turkish companies that are saddled with unhedged dollar- and euro-denominated debt and raised fears that the country could struggle to meet its large external financing needs,” he said.

"This would be another headwind for EMs as an asset class, but the scope for wider economic spill-overs appears contained.”

On Monday the lira dropped to as low as 7.2362 against the dollar before trading at 6.9149 at 04:20 p.m. in Abu Dhabi. The South African rand fell to its weakest in more than two years, while the Mexican peso and the Indonesian rupiah also declined. The Indian rupee fell to a record 69.92 against the green-back while the euro also fell on fears of contagion to 1.14, according to Bloomberg.

David Kohl, the chief currency strategist at Julius Baer said the Turkish president’s comments in May, calling interest rates “evil”, suggest there are "no intentions to win market confidence in order to stabilise the weakening currency”. The demonisation of interest rates by Mr Erdogan is a “particularly dangerous development”, as it sets the mark high for the exchange rate level at which the central bank will have no choice but to hike rates aggressively.

“The current interest rate level of 17.7 per cent is clearly insufficient to reverse the drop of the lira,” he wrote in a research note.

The turmoil of Turkish financial markets has had reverberations also on Qatar.

Shares of Qatar National Bank, which owns Turkish lender Finansbank, continued to slide on Monday, falling 2.56 per cent at the close of trading on Monday, a day after shedding 4.7 per cent, the largest single day drop since a diplomatic crisis with four Arab countries broke in June 2017 over Doha's support for terrorist groups and internal meddling in the affairs of other countries.

About 15 per cent of QNB's assets and 13 per cent of its loans are linked to Turkey, according to Arqaam Capital. Finansbank is the fifth-largest privately-owned bank by assets in Turkey.

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