Turkish Lira crashes after Erdogan fires central bank chief

The turmoil comes after President Recep Tayyip Erdogan on Friday unexpectedly fired Naci Agbal, the central bank governor who has repeatedly raised interest rates in his attempt to tame inflation since his appointment in November. Foreign investors believe that the move again raises concerns that the central bank has lost its independence from political influence, which has reduced the credibility of policymakers and the appetite for Turkish assets.

The new governor, Sahap Kavcioglu, on Sunday tried to reassure markets by saying the theme of inflation is the main goal of the bank. He also undertook to promote economic stability by reducing borrowing costs and boosting growth. Money managers are worried that it could allow the currency to weaken and accept rising inflation levels to lower interest rates.

“We are really trying to determine the degree of commitment to the lira,” said Simon Harvey, senior foreign exchange market analyst at broker Monex Europe. “We know in Turkey that interest rates are politically sensitive.”

Turkey’s benchmark Borsa Istanbul 100 stock index fell as much as 9.4% on Monday, putting it on course for its sharpest sell-off since June 2013, causing two trades. The Nasdaq exchange-traded iShares MSCI Turkey exchange-traded fund fell 17.5% in pre-trading.

The turmoil in Turkey’s financial markets has highlighted the risks of investing in emerging markets, but has shown muted signs that it has for the time being been flooded. The Mexican peso and the South African rand declined slightly against the dollar.

Shares in Spanish bank BBVA fell more than 6% in Madrid. Turkey is responsible for more than 10% of the profit for BBVA through its 49.9% stake in the Turkish bank Guarantee BBVA,

according to Jefferies.

The lira was one of the best performing currencies in the emerging market this year, as investors welcomed the recent interest rate hikes. Overseas money managers added a net $ 4.6 billion to Turkish equities and local currency bonds during Agbal’s tenure, betting that higher interest rates would help curb inflation and stabilize the lira.

Before the appointment of mr. Agbal at the central bank, investors have been selling Turkish assets for much of 2020, as low interest rates and high credit expansion increased imports. The currency weakened, causing several wages to intervene to stabilize the lira, even though investors speculated that the currency would weaken. The central bank at one point sold its own reserves and those borrowed from local banks, to such an extent that it owed more foreign exchange reserves to the banks than it owned.

Mr. Kavcioglu, the fourth head of the Turkish central bank in less than two years, is a former member of parliament from Mr. Erdogan’s Party for Justice and Development and columnist for pro – government newspaper Yeni Safak. He publicly sided with Mr. Erdogan’s preference for lower interest rates.

Agbal’s layoff comes on the heels of an interest rate hike on Thursday that exceeded expectations and pushed the lending rate from 19% to 19%.

The prospect of a renewed interest rate cut cycle under Mr. Kavcioglu raises concerns about the country’s prospects.

The cost of insuring Turkey’s government debt against default jumped sharply on Monday, rising to an annual cost equal to $ 476,000 for every $ 10 million worth of bonds over a five-year contract. According to IHS Markit, it is higher than $ 306,000 by Friday’s close, according to IHS Markit. This is the highest since last November.

“It’s as surprising as I can remember in the twenty years I’ve been doing this job,” said Paul McNamara, an investment director at GAM Investments in London, which manages emerging market debt funds. He has been sitting on the appreciation of the lira for the past few months through currency futures contracts, which are agreements to buy or sell a currency on a specific date at a predetermined rate.

Mr. McNamara said he expects a large volatility in the lira this week as he and other investors clarify more about Mr. Kavcioglu expects.

Some investors also worried that Turkey would limit its ability to sell local assets to stem the turmoil in the market. Lütfi Elvan, Turkey’s Minister of Finance and Treasury, issued a statement on Monday indicating that Turkey would not impose capital controls or set a fixed exchange rate.

Any interest rate cuts may not be made immediately. In the statement of Mr. Kavcioglu on Sunday said that the schedule for monetary policy meetings, where the standard rates are set, will remain unchanged. The next meeting will be on April 15.

“If you’re committed to the meeting plan, you do not have a meeting this week to lower interest rates, so there is a short postponement for investors,” said Kieran Curtis, an emerging market fund manager at Aberdeen Standard Investments. he bought lira-denominated bonds under mr. Agbal.

“The next move will definitely be off,” said Mr. Curtis added. “The question was when the rates would go down and how far.”

—Joanne Chiu, Jared Malsin, and Paul J. Davies contributed to this article.

Write to Caitlin Ostroff by [email protected]