President Erdogan is changing the central bank governor for the third time. Currency and stocks crash. How investors react. By Julia Groß, Euro am Sonntag
FFor five months, Naci Agbal’s conservative rate hikes built confidence in the Turkish economy, supported the Turkish lira and curbed inflation. Gone – Turkish President Recep Tayyip Erdogan surprisingly dismissed his central bank chief last Saturday, triggering an earthquake in the local financial market.
Burglary on all fronts
At the beginning of the week, the Turkish lira experienced its biggest drop in prices in around 20 years, with the dollar and euro appreciating against the lira by more than ten percent at times. The yield on ten-year Turkish government bonds rose by almost seven percentage points to 20 percent. The Istanbul share index fell by ten percent, and the shares of banks with significant exposure to Turkey lost value around the world. “The abrupt dismissal of Governor Agbal is likely to have lasting damage to investors’ confidence in the Turkish financial market,” the bond team of the British fund company M & G is convinced.
Agbal’s successor will be ex-banker and ex-MP Sahap Kavcioglu, who is assessed as conforming to the government. He has already attracted attention several times through comments that corresponded to Erdogan’s opinion that inflation can only be combated with low interest rates. This runs contrary to the common economic doctrine. Most recently, the inflation rate was 15 percent.
A change of course by Kavcioglu could have fatal consequences for the Turkish economy. Many companies have taken out large loans abroad; the foreign debt is currently around 435 billion dollars, almost 90 percent of which is in dollars and euros. If the lira continues to depreciate – which is to be expected in the event of interest rate cuts – the repayments will become unaffordable for Turkey. If loans burst, banks will at some point no longer want to lend money. In the worst case scenario, this could drive Turkey into bankruptcy. Alternative ways of fighting inflation, such as capital and price controls, also stifle economic growth.
Uncertain future
It is possible that the new head of the central bank is acting against Erdogan’s convictions, which shows Agbal’s example, according to experts. But in the long term nobody seems to assert himself against the president. In the medium term, analysts therefore expect the lira to continue to depreciate against the euro and dollar. Investors who are very willing to take risks can rely on a knock-out note from Vontobel (ISIN: DE 000 VP4 HYP 0). The leverage is 3.9. If the euro falls to 7.20 Turkish lira, there is a total loss.
