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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Turkish lira crisis: US threatens fresh sanctions, as minister rules out capital controls – as it happened

Turkish treasury and finance Berat Albayrak, who will address international investors about the lira crisis today
Turkish treasury and finance Berat Albayrak, who will address international investors about the lira crisis today Photograph: Murad Sezer/Reuters

Here’s our news story on the Turkish currency crisis.

That’s probably all for today. Goodnight! GW

Wall Street is on a tear today, with the Dow Jones up more than 400 points (or 1.6%) in afternoon trading.

Traders seem to be much more relaxed about Turkey and US-China trade wars than yesterday. Perhaps too relaxed, given we’ve only seen modest progress on both issues today....

President Trump hosting today’s Cabinet Meeting
President Trump hosting today’s Cabinet Meeting
 Photograph: Oliver Contreras / POOL/EPA

Ouch! President Trump also told his cabinet meeting that Turkey hasn’t been a good friend, according to reports.

Reuters says:

The United States and Turkey have exchanged tit-for-tat tariffs in Trump’s attempt to persuade Turkish President Tayyip Erdogan to give up Brunson, who denies charges that he was involved in a coup attempt against Erdogan two years ago.

“They have not proven to be a good friend,” Trump said of Turkey during the Cabinet meeting. “They have a great Christian pastor there. He’s an innocent man.” ....

Trump said the United States had helped Turkey in a related incident, but that the NATO ally had not repaid the favor.

“They want to hold our wonderful pastor. Not fair, not right,” he added.

Turkey’s conference call with investors failed to really address one key issue -- whether interest rates will be raised sharply to support the lira (as some economists believe must happen).

Robert Ward of the Economist Intelligence Unit say this is a big concern:

The lira has pared some of its earlier gains, following Mnuchin’s threat to roll out more sanctions on Turkey.

It’s now trading at nearly 5.9 lira to the US dollar, compared with 5.7 earlier.

Updated

US prepared to impose more sanctions on Turkey

NEWSFLASH: America has signalled it will impose more sanctions on Turkey, unless US pastor Andrew Brunson is released from house arrest.

The threat comes hot from the White House, where Donald Trump has been holding a cabinet meeting.

During the meeting, the president criticised Turkey for holding the “wonderful pastor” since 2016 on espionage charges.

He then asked treasury secretary Stephen Mnuchin about the state of play regarding Turkey.

Mnuchin replied that America has put sanctions on Turkey, and “we are prepared to do more”, according to CNBC.

That’s a timely reminder that the diplomatic row between Ankara and Washington could easily escalate, if Brunson continues to be detained.

Updated

It’s been a remarkable week for the lira.

After plunging in early trading on Monday, it’s fought its way back as Ankara has clamped down on currency speculation, urged the public to help resist the ‘economic war’, and tried to reassure investors.

But it’s still much weaker than in April, when one dollar only bought 4 lira.

A sense of relief has swirled through most of Europe’s stock markets today.

All the main indices have closer higher tonight, bar one -- Italian construction stocks declined in the aftermath of the Genoa bridge collapse tragedy.

Otherwise, the FTSE 100 gained 58 points - or 0.75% - clawing back most of yesterday’s losses.

European stock markets tonight
European stock markets tonight Photograph: Thomson Reuters

Traders are a little less anxious about contagion risks Turkey today, following the Albayrak call.

Worth noting, though, that the main Turkish stock index slid by 3.5% today, even though the lira recovered.

Trade war worries have also ebbed, with China now planning to send a delegation to the US for fresh talks.

Fiona Cincotta of City Index says:

After heavy falls for the miners in the previous session, today the miners were the top sectorial gainer as metal process rebounded.

News that China is sending a trade delegation to Washington for the first attempts at trade talks since the US levied tariffs on $50 billion of Chinese imports has boosted optimism that a deal between the two powers is still a possibility, even if a distant opportunity. Notably senior Chinese officials won’t be in attendance, showing a level of caution from China over the ability of the two sides to reach a deal.

However, for the markets it’s a step in the right direction.

Turkey’s pledge to strengthen its fiscal position (see earlier post) is likely to mean tough spending cuts.

The Financial Times says:

Turkey has set out plans to cut spending to bolster the lira as it seeks to navigate a way out of the crisis that has hit the currency and shaken emerging markets.

In a much-anticipated conference call with 6,000 investors, Berat Albayrak, finance minister, indicated the country would largely use fiscal measures to slow down the economy and reduce a hefty current account deficit and inflation running at 16 per cent.

Mr Albayrak said the government would be asking ministries for expenditure cuts of 10-30 per cent and that it would be aiming at a primary surplus of six billion Turkish lira for the rest of this year — which analysts suggested could be Turkey’s biggest fiscal tightening this century.

Updated

This chart shows how Turkey’s external borrowing has risen sharply in the last few years, as a credit boom has driven growth:

Turkey’s external borrowing:

And this one shows how Ankara has run up larger budget deficits recently:

Government borrowing has risen, in line with faster growth

Cristiana De Alessi of BNP Paribas has given Turkey’s new finance minister some credit for his comments today, but warned that Turkey faces a struggle.

She cites Turkey’s reliance on external funding (its corporate sector owes around $220bn in foreign debt, according to CNBC):

“The finance minister provided some comfort by acknowledging that rebalancing the economy is a priority through both fiscal and monetary policy and that capital controls aren’t an option.”

“The MTP (medium term programme) released in September will be key to see what concrete steps will be taken to turn this into sustained action. It will also provide a benchmark to measure the new government’s progress.

My main concern is a lack of contingency plan if debt cannot be rolled over or if a slower growth rate exacerbates corporate NPLs. Turkey may require a stronger adjustment than is currently in their plans.”

Turkish currency crisis: What the experts say

Per Hammarlund, chief EM Strategist at Nordic bank SEB, fears that Turkey could be forced to seek help from the IMF -- despite Albayrak’s pledges today.

He writes:

Turkish Finance Minister Berat Albayrak continues to reassure investors that Turkey will address its structural problems, but at this stage crisis measures, including sharply higher policy rates, a tightening of fiscal policy and support to troubled sectors such as construction, retail and banking will be key.

“In sum, the economy is set to slow down sharply. The Central Bank of the Republic of Turkey (CBRT) has been forced to hike interest rates sharply [earlier this year], which will have a dampening effect on credit growth. It will also increase default rates and the need for debt restructuring, hurting banks’ asset quality.

“A credible commitment to grant the Turkish central bank monetary policy independence is critical. Unless the government introduces an austerity programme within the next weeks, an event such as sharply higher inflation (likely) or a large fine on Halkbank for violating US sanctions on Iran (possible) could trigger a full-blown balance of payments crisis, followed by a banking crisis. So far, the government has shown few signs of being willing to change course, either on economic policy or in its relations with the US.

“The TRY is in for a bumpy ride on the road to the International Monetary Fund (IMF). The CBRT’s actions this week and agreements with China and Qatar may take USD/TRY down to 5.50 or even lower, but without structural reform, the pair could reach 8.00 this year.”

Gulay Girgin of Turkish bank Sekerbank argues that Albayrak performed well, telling Reuters that:

“It was Albayrak’s first investor call. In general, I found it successful as the rhetoric suggests that they are aware of the problems in Turkey’s economy and reasonable solutions are being prepared. It’s very valuable that they underlined the negative effects of inflation on the economy and the target of single digit inflation was emphasized.”

“I also find the sustainable growth goal important. The importance of fiscal discipline was stressed. In a nutshell, it shows that problems of the economy can be discussed with investors and confidence can be restored.

Paul McNamara of asset manager GAM is less effusive though:

Ryan Connelly of Frontier Strategy Group was encouraged to hear Albayrak rule out capital controls:

Updated

The lira is continuing to strengthen, following Berat Albayrak’s conference call.

It has now gained around 4.5% today, meaning one dollar is worth 5.7 lira, down from almost 6 lira to the dollar last night.

Heres are the key points from Berat Alkayrak’s first major performance before international investors:

[FDI = foreign direct investment, such as the $15bn pledged by Qatar yesterday]

Thousands of investors had piled onto the conference call. That shows the level of interest in Turkey’s predicament around the globe.

Updated

Albayrak ends the call by saying he’s like to meet investors soon.

[Background: Some institutional investors have grumbled that Albayrak hasn’t been willing to meet them and has been taking a ‘bunker mentality’ since becoming treasury and finance minister in July]

Earlier in the call, Berat Albayrak said he doesn’t expect state-owned Turkish bank Halkbank to be fined by America for allegedly helping Iran evade U.S. sanctions.

Halkbank’s shares have jumped by 3.6% on this news.

In May, a Halkbank executive was sentenced for two years and eight months in prison.

He was convicted of charges of bank fraud and conspiracy to evade US sanctions for his role in a multibillion-dollar gold-for-oil scheme designed to avoid Obama-era sanctions on Iran.

Some analysts have suggested that Halkbank could be targeted by Washington, if the diplomatic row with Ankara isn’t resolved.

On US sanctions, Berat Albayrak says Turkey will turn to other parties - such as China and Germany - help it navigate the current situation.

Here’s Reuters’ first take on Albayrak’s conference call (which is still going on):

Finance Minister Berat Albayrak said on Thursday Turkey won’t hesitate to provide support to the banking sector, which was capable of managing current volatility, and there has not been major deposit flow from banks lately.

In a conference call with investors, Albayrak said Turkey had already taken measures to curb forex funding and corporate sare in a comfortable position to meet short-term liabilities.

Albayrak is now talking about the need to co-ordinate fiscal and monetary policy.

In other words, the government and the central bank need to work together to fight the crisis.

Investors, though, will want to know whether Turkey’s central bankers will actually be given free rein on monetary policy, to raise interest rates.

Here’s Albayrak’s take-home message for investors:

Turkish finance minister: No plans for capital controls

Newsflash: Berat Albayrak says Turkey doesn’t have any plans to bring in capital controls [ie, restricting bank withdrawals and the movement of money in and out of the country].

It also isn’t planning to turn to the International Monetary Fund, he tells investors.

Albayrak is insisting that Turkey remains committed to the free market.

On the fiscal side of things, Albayrak says Turkey wants to boost its primary budget surplus.

All ministries have been asked to contribute to an “ambitious savings programme”.

It sounds like he’s promising to keep spending tight, saying that fiscal discipline is one of the anchors of the economy.

Albayrak says that reducing inflation is Turkey’s top priority; it wants inflation to be in ‘single-digits’ as soon as possible.

[Currently Turkish inflation is running at 15%]

More snaps from Bloomberg:

Turkish conference call with investors begins

The crucial conference call between Turkey and thousands of investors is underway!

Finance minister Berat Albayrak began by telling the call that Turkey will emerge from the current period of volatility stronger.

He says that Turkey’s banking sector is healthy and strong, and capable of managing the situation. There hasn’t been any major deposit flow from the banks either.

We “won’t hesitate” to provide support to the banks if needed, Albayrak continues:

More to follow....

Trump administration: We love a strong dollar

Larry Kudlow, Director of the National Economic Council.
Larry Kudlow, Director of the National Economic Council.

Just in: Donald Trump’s top economic advisor has hailed the strength of the US dollar - even though it’s causing serious pain in emerging markets.

Speaking on CNBC, Larry Kudlow said the the strong dollar is a “sign of confidence” in the United States, and good news for Americans

“There’s a lot of unrest around the world. Money is flowing into the U.S.A. That’s terrific.

“By the way, a strong dollar holds down commodity prices, gasoline prices are slipping, oil prices are slipping”.

Kudlow’s boss has also just tweeted about the ‘cherished’ dollar:

However, a strong dollar INEVITABLY means other currencies are weaker, something Trump has labelled currency manipulation. The White House can’t have it both ways.

Turkish and French presidents speak

Newsflash: President Erdoğan has spoken by phone to French president Emmanuel Macron.

The two leaders “emphasised the importance” of improving bilateral investment, and economic and trade relations, according to the Turkish side.

Macron also (apparently) told Erdoğan that Turkey’s economic stability was important to France.

[He may have been thinking of the French banking sector; BNP Paribas is one of the European lenders with particular exposure to Turkey]

This is why Turkey needs to persuade foreign banks to keep lending to its corporate sector:

Updated

If Turkey can’t restore market confidence, it could become swept into a full-blown financial crisis that forces it to impose capital controls.

This would prevent citizens and businesses emptying their bank accounts, stopping a run on the banking sector.

But it could also create a wider crisis, undermining confidence in other emerging markets.

Kamakshya Trivedi, co-head of emerging markets and foreign exchange research at Goldman Sachs, says capital controls wouldn’t address Turkey’s big challenge - rolling over hundreds of billions of US-dollars worth of loans from foreign banks.

He told CNBC this morning:

“Full-blown capital controls that everybody is worried about I think have a pretty limited chance of success, partly because they have a big external funding requirement.

Back in the UK, social media personalities who gush about their favourite products -- but don’t reveal they’ve been paid -- have questions to answer.

The Competition and Markets Authority (CMA) fears that some “influencers” are breaching consumer protection law, which requires that any reward received for an endorsement is disclosed.

It has asked a range of celebrities and social media influencers to explain “the nature of the business agreements they have in place with brands”....

A market in the centre of Ankara.
A market in the centre of Ankara. Photograph: Adem Altan/AFP/Getty Images

Here’s our news story on the lira’s recovery today (it’s still up 3% at 5.8 to the dollar)

A City trading screen

There’s a calmer feel in the markets today, with Britain’s FTSE 100 up 43 points or 0.6% at 7541.

Yesterday it shed 1.5%, as investors fretted about a possible emerging market slowdown.

Reports out of Beijing that the US and China will hold a new round of discussions at the end of this month has cheered the City, explains Michael Hewson of CMC Markets:

This has prompted a rebound in the Chinese Renminbi from its recent lows while the continued recovery in the Turkish lira has alleviated short term concerns of a collapse in the currency.

Here’s our story on the talks:

A shopping basket filled with groceries

Meanwhile in the UK, retail sales have bounced back thanks to the heatwave (which seems to have bunked off today, alas) and the football World Cup.

The Office for National Statistics reports that retail spending rose by 0.7% in July, reversing a 0.5% drop in June. Food sales were strong, as Brits hit the barbecue and sustained themselves through England’s charge to the 3rd-4th place playoff.

Online sales hit a new record high too, at 18.2% of total spending -- a reminder that the traditional high street is still under pressure.

How Turkey could regain market trust

Turkey needs to make four changes to persuade the markets that it’s serious about tackling its credit binge, argues Holger Schmieding of German bank Berenberg.

And, awkwardly for Berat Albayrak, that includes appointing a finance minister who isn’t married to president Erdoğan’s daughter. It also includes tightening government spending, and giving the Turkish central bank the freedom to raise interest rates (something Erdoğan is opposed to).

Here’s Schmieding’s to-do list for Turkey:

  • Independent central bank: Making the CBT truly independent again – and thus able to pursue a policy that could inflict short-term pain for long-term gain – would make a policy change more credible.
  • Fiscal prudence: In emerging markets, monetary excesses often reflect prior fiscal choices. A monetary policy U-turn thus needs to be complemented by a sustainable fiscal policy. Otherwise, markets would suspect that the rising debt – including the debt of institutions de jure or de facto directed by the government – would eventually be accommodated by the central bank again. In such a case, the turn in monetary policy would not be sufficiently credible for long.
  • Change in key personnel: Appointing central bankers and a finance minister who command trust – and who are perceived as being able to withstand political pressure – could signal that Turkey is serious about a policy change. A finance minister who is the son in law of the country’s autocratic president does not suit that description easily.
  • Mending relations with the US and the EU: US sanctions are not the cause of Turkey’s completely home-made economic problems. They merely triggered Turkey’s most recent sell-off. However, mending relations with the US and the EU would help in two ways. First, exactly because Erdogan may find it so difficult to ditch the policies that got him into trouble with the US and the EU, a shift in his approach to the US and EU could signal that he is serious about a change in economic policies as well. Second, US and EU concerns about Turkey partly focus on arbitrary detentions in Turkey. Anything that could be seen as strengthening the battered rule of law in Turkey may make Turkey a little more attractive for foreign direct investment again.

The Financial Times agrees that Turkey’s finance minister Albayrak faces a huge test when he speaks to investors on this afternoon’s conference call.

Some worry that Mr Albayrak and his team are simply out of their depth, having been caught off-guard by an economic and political crisis just weeks into the job.

“I have concerns that they fully comprehend the root of this problem,” said a person who has dealt with members of Mr Albayrak’s team.

“They think their economy is in good shape and this is a pure economic war against them. “They keep saying there’s a positive side [to what is happening] and that, if the lira is at TL6.8 to the dollar, it will improve exports and stabilise the current account deficit.

Yes, that is true. But can you imagine how many people will declare bankruptcy one after another?”

More here: Turkey’s fledgling finance minister put to the test

Berat Albayrak’s family connections make it harder for him to establish confidence with investors.

After all, it’s possible that the best possible candidate to become finance minister is also the president’s son-in-law. But it’s not a great look.

Reuters has a good take:

Albayrak must convince jittery markets that Turkish monetary policy will be determined by economic reality - and an independent central bank - rather than the powerful family chief behind his meteoric rise.

Economists attributed the lira’s modest recovery on Wednesday to central bank measures which squeezed lira liquidity, raising borrowing costs without hiking the benchmark interest rate.

Albayrak’s public statements have so far had less success.

Last Friday, from a hall in the ornate Ottoman-era Dolmabahce palace on the shores of the Bosphorus, he outlined the government’s new economic plan in a powerpoint presentation to bankers and business leaders.

He promised central bank independence, tighter budget discipline, structural reform and “sustainable and healthy growth”. But the lack of detail or clear action worried markets.

“The issue here is that he lacks credibility,” said Piotr Matys, an emerging markets strategist at Rabobank. “The market doesn’t want to give him the benefit of the doubt”.

Berat Albayrak’s rise to power has attracted comparisons to another well-connected son-in-law, Jared Kushner.

My colleague Martin Chulov explains how Albayrak has shimmied up the greasy pole:

Albayrak completed a master’s of finance at New York’s Pace University, before completing a PhD in Turkey. In 2006, two years after his marriage, he was appointed the chief executive of the energy and media conglomerate Çalık, a role that opened connections across the region. In 2015, Albayrak was named energy minister – the same year he became an MP. By later that year he had begun to consolidate political power, moving from one of the country’s most influential businessmen to a figure at the heart of the power base – and unmistakably tied to his father-in-law.

He displayed a ruthless streak, eliminating perceived rivals within the ruling AKP party, such as Turkey’s then prime minister, Ahmet Davutoğlu, and anyone perceived to be disloyal to Erdoğan.

In the following years, Albayrak became both feared and formidable, acting as Erdoğan’s enforcer, while at the same time gathering powers that made him almost untouchable – as long as Turkey’s current leader remains in power. The pair’s relationship has grown so close that Erdoğan’s trust has been described by those who know the pair’s dynamic as almost unconditional....

More here:

The lira’s rally suggests Turkey’s attempt to repel speculators is paying off.

Yesterday, Turkish financial regulators imposed new restrictions on the country’s banks, which effectively made it harder and more expensive to ‘short’, or bet against, the lira.

That’s helping the lira to struggle back, but there’s certainly room for further improvement:

There are encouraging signs for Turkey in the financial markets today:

The agenda: Turkey to address international investors

A currency exchange shop in Istanbul.
A currency exchange shop in Istanbul. Photograph: Chris McGrath/Getty Images

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Living up to family expectations can be tough. But few sons-in-law will have faced such a daunting challenge as Berat Albayrak, Turkey’s finance minister.

Albayrak, who just happens to be married to president Erdoğan’s daughter Esra, has been facing a growing currency crisis since becoming Turkey’s treasury and finance minister last month.

The surprise, and frankly questionable, promotion of the 40-year old Albayrak to such a crucial job arguably contributed to Turkey’s currency crisis, as it indicated Erdoğan would be taking a more authoritative approach to economic issues.

Berat Albayrak speaking this week
Berat Albayrak speaking this week Photograph: Anadolu Agency/Getty Images

Today, Albayrak gets the chance to prove he’s up to the task when he holds a conference call with international investors. Up to 3,000 investors and economists will dial in, Reuters believes.

Albayrak’s task is to calm the jitters that drove the lira to record lows this week. That means proving that Turkey’s central bank is actually independent, and that Ankara is committed to tackling inflation, and reining in its current account deficit.

With talk swirling that Turkey could be forced into capital controls, or an IMF bailout, Albayrak needs a solid performance -- something that shows that Erdoğan didn’t goof when he kept such a vital role in the family.

The call takes place at 4pm local time, or 2pm BST.

There is some optimism in the markets this morning. The Lira has risen to 5.7 lira to the US dollar, up 3% today.

That’s an improvement on Monday’s record low of 7.2, but still 20% less than a month ago.

Some traders are encouraged that Qatar offered Turkey $15bn of investment yesterday. But there’s no progress in the diplomatic row with America over the US pastor, Andrew Brunson, who’s still under house arrest.

Yesterday was a ropey day in the City, and beyond. Shares fell across Europe, while emerging markets fell into a bear market, having lost 20% of their value since January.

Commodity prices also got thumped, amid fears over Turkey, China’s economy, and trade war fears.

Today may be a bit brighter, though; China has said it will send a delegation to Washington to discuss trade issues later this month.

The agenda

  • 9.30am BST: UK retail sales for July
  • 10am BST: Eurozone trade figures for June
  • 2pm BST: Turkish government conference call with investors

Updated

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