Turkey central bank ready to save Lira as Asian market tumbles

Lira dives almost eight percent Monday as fears from that crisis could spill into global economy, Ankara ready to take ‘all necessary measures’.
Monday 13/08/2018
As well as the lira, emerging market and other high-yielding currencies tumbled across the board

ANKARA - Turkey's central bank on Monday announced it was ready to take "all necessary measures" to ensure financial stability after the collapse of the lira, promising to provide banks with liquidity.

Asian and European markets tumbled and the Turkish lira dived almost eight percent Monday on fears that the economic crisis gripping Turkey could spill over into the global economy.

With investors already on edge over the China-US trade war, the lira's collapse sparked a sell-off in Europe and New York at the end of last week, with safe haven assets including the Japanese yen and Swiss franc rallying.

"The central bank will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary," the bank said in a statement, vowing to provide "all the liquidity the banks need”.

The statement came after the Turkish lira hit record lows against the dollar amid a widening diplomatic spat with the United States.

The detention of US pastor Andrew Brunson since October 2016 on terrorism charges has sparked the most severe crisis in ties between the two NATO allies in years.

The central bank announced the series of measures on Monday, a day after Erdogan's son-in-law Berat Albayrak, who is treasury and finance minister, announced an action plan was in the pipeline.

"In the framework of intraday and overnight standing facilities, the Central Bank will provide all the liquidity the banks need," the bank said.

The bank also revised reserve requirement ratios for banks, in a move also aimed at staving off any liquidity issues.

It said with the latest revision, approximately 10 billion lira, $6 billion, and $3 billion equivalent of gold liquidity will be provided to the financial system.

The nominally independent central bank has defied pressure to hike interest rates which economists said would curb the fall of the lira.
Erdogan on Saturday called interest rates as "tool of exploitation" that makes the poor poorer and the rich richer.

- Vulnerabilities -

"The decline in the lira is multifaceted, caused not only by a weak external position in terms of current account deficit and inadequate currency reserves, but also the challenging political environment which exacerbates the vulnerabilities in the lira," said Kerry Craig, global market strategist at JP Morgan Asset Management.

"A mid-meeting rate hike and tightening of monetary policy may help to avert the lira's decline, to some extent.”

As well as the lira, emerging market and other high-yielding currencies tumbled across the board.

The Russian ruble, already under pressure after the US hit Moscow with sanctions last week, lost two percent, while the South African rand was battered seven percent.

South Korea's won and the Australian dollar retreated 0.4 percent and the Indonesian rupiah lost 0.9 percent and is at its weakest level since October 2015.

The Indian rupee hit a new low of 69.62, extending a recent sell-off with high crude prices also squeezing the unit as India is a net importer of oil.
The yen, a go-to unit in times of turmoil, rose against the dollar, while the Swiss franc was also higher.

"The dominating theme of this week is likely to be the Turkish situation," Okasan Online Securities said in a note to clients.
"The 'Turkey shock' from last weekend, triggered by sharp plunges of the lira, has fuelled fears that it may impact financial institutions in Europe," it said.

On equity markets Hong Kong shed 1.5 percent and Shanghai finished 0.3 percent lower, while Tokyo dropped two percent with exporters hurt by the stronger yen.

Sydney fell 0.4 percent, Singapore was 0.8 percent lower and Seoul shed 1.5 percent. There were also sharp losses in Taipei, Manila and Jakarta, which dived 3.3 percent after Indonesia reported Friday its biggest current account deficit in about four years.

London fell 0.5 percent in the morning, while Paris slipped 0.3 percent and Frankfurt was 0.6 percent lower.

The sharp losses come despite the fact Turkey accounts for just one percent of the world economy, meaning there is little risk to the world economy, or even the eurozone.