Saturday August 11, 2018
By David Reid
The Turkish lira
has collapsed to an all-time low against the dollar, but the country's
leader has brushed aside concerns, telling Turks "we have our God." The
Turkish President Recep Erdogan then followed those comments up Friday by urging Turks to sell dollars and gold and buy lira.
At around 8:00 a.m. ET Friday, the lira
had fallen to $7.081, an almost 11 percent loss for the session. It has
since pared some losses. As recently as April one dollar bought about
four Turkish lira.
The first wave of selling
came early Friday after a Turkish delegation returned from the United
States with apparently no progress on the detention of a U.S. pastor.
The evangelist, Andrew Brunson, is charged with supporting a group
blamed for an attempted coup in 2016.
President Donald Trump
said in July that the U.S. would place "large sanctions" on the country
for the pastor's detention. On Friday, Trump appeared to back that
position up by posting on Twitter that he would double the level of
tariffs on steel and aluminum to 20 percent and 50 percent respectively.
So far there has been no confirmation to CNBC of the policy from the United States Department of Commerce.
Late Thursday, and prior to Trump's tweet, Erdogan said he would stand up to pressure from the United States.
"There are various
campaigns being carried out. Don't heed them," Erdogan said Thursday.
"Don't forget, if they have their dollars, we have our people, our God.
We are working hard. Look at what we were 16 years ago and look at us
now," Erdogan told supporters.
On Friday afternoon
Erdogan dug in again, calling for citizens to convert out of dollars and
gold and buy the lira to help fight a "national struggle". In response,
the currency renewed its sell-off. In his speech in the northeastern
city of Bayburt, Erdogan added that he would decisively defend the
country against economic attacks.
The lira's three-month
implied volatility gauge hit its highest since late 2008. Implied
volatility shows the market's opinion of the currency's potential moves.
If the implied volatility is high, the market things the currency has
potential for large price swings in either direction.
European bank concern
The euro
dropped 0.5 percent against the dollar on Friday morning, following
reports that the European Central Bank (ECB) is concerned over the
impact of a weak Turkish lira on European banks.
According to the Financial Times,
the lira's depreciation could hurt European banks such as Spain's BBVA,
Italy's UniCredit, and France's BNP Paribas in particular.
Speaking to CNBC's "Squawk Box Europe" Friday,
Timothy Ash said the FT report was "sensationalist" as any losses
incurred by the banks would be by local subsidiary branches who had
invested using Turkish lira and not U.S. dollars.
He added however that
while banks in Turkey remained in reasonable shape, the country did have
a problem with its balance of payments that has occurred because the
economy had been allowed to overheat.
"Ultimately now, there is
zero credibility in the Central Bank of Turkey and zero credibility in
Turkish policy making. Whatever they do, the market doesn't believe
them," Ash said.
Economic pressure
Turkey's economy is seen as particularly fragile
due to its high level of debt that is priced in dollars. The more the
lira weakens, the more expensive that debt becomes. The latest estimates
from the International Monetary Fund
(IMF) show that the total amount of Turkish debt payable in other
currencies is more than 50 percent of the country's gross domestic
product.
Inflation in the country
has been rampant with consumer prices rising almost 16 percent in July
alone. While the country's central bank has raised interest rates in the
past to support the currency and quell inflation, the most recent
meeting in July saw the Turkish central bank unexpectedly hold its
benchmark interest rate at 17.75 percent. Erdogan has repeatedly
insisted that rates should not be raised too high, triggering
suggestions that the central bank doesn't act with full independence.
Berat Albayrak, Turkey's finance minister, is set to reveal "a new economic model" later Friday.