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Investors were shocked after Erdogan’s rise in Turkish markets

Investors were shocked after Erdogan’s rise in Turkish markets

Investors in emerging markets are very accustomed to the unpleasant surprises of Turkey. But the latter – on the last weekend night of a respected central bank governor who has been in office for just four months – has dropped shots.

The Throwing Naci Agbal, Nothing else 36 hours after stepping up 2 percentage points in the country’s benchmark interest rate, it sent Turkey’s currency, stocks and bonds into free fall when markets opened on Monday. For foreign fund managers, it’s bad enough.

But Turkish money markets also hijacked it, sharpening the blow. Investors have said it is more difficult to withdraw money or cover the way the pound is covered in an event that could cause lasting damage to investor confidence.

“It’s really a feeling of exasperation,” said Yerlan Syzdykov, head of the emerging markets for Europe’s largest asset manager in London, Amundi. “We were getting to the point where Turkey was rebuilding credibility.”

Syzdykov was making positive bets on Turkey’s debt, both corporate and sovereign, and was in a long position when Agbal’s horrific shooting in the early hours of March 20 took place. In chaotic markets after his release, he was unable to reverse the route.

“It’s been a difficult couple of days,” said a deflated Syzdykov. “We have tried to reduce our exposure. We were able to go down to neutral, but we were overweight. The [market] the conditions are very difficult. Liquidity has evaporated. Foreign investors are quite frustrated. “

Analysts and fund managers say that a sense of stagnation in a gross bet will make it much more difficult and costly for Turkey to secure the foreign financing it needs in the future.

“Markets saw Agbal’s appointment as a key change. The hedge funds and other investors entered the money. But I knew the president would never change, “a former Turkish official said.” That says there are no rules. That way you don’t treat people who finance your current account deficit. “

President Recep Tayyip Erdogan has long had a close relationship with foreign fund managers. Opponent of high interest rates, which he has previously labeled “Mother and father of all evil”, has been working for several years against the measures that major economists are helping to suppress harmful inflation. In the 2018 lira crisis, he cited the shadow of the “interest rate lobby” of Western financiers in an attempt to weaken his paternalistic authority.

But orthodoxy prevailed at the end of last year. Agbal was appointed to head the central bank – an economic shock. Berat was Albayra, the finance minister and Erdogan’s son-in-law. he did not promise the respect of outside observers was thrown out.

Agbal set a significant rise in interest rates by 8.75 percentage points by the time Erdogan was released. This raised the pound by 18 per cent in just four months, making it the first head of the central bank to consolidate the pound since the 2008 financial crisis – a big step towards controlling inflation, which is still around 15 per cent a year.

Line chart of the% change for the month, showing the stock market crash in Istanbul

According to central bank data, about $ 16 billion was introduced in Turkey to reverse interest rate lira rates between Agbal’s appointment on November 7 and March 19, the last data point. Another $ 4 billion went into the country to buy government bonds in the pound, and at the same time, net flows to shares were about $ 700 billion, up from about $ 1.8 billion in February. According to the International Monetary Institute, the additional flows of sovereign bonds denominated in foreign currencies, corporate bonds and loans added another $ 4 billion.

It seems that the recent rise in Agbal’s rates, which was double the economists ’forecast, was too much for Erdogan. Some investors say that even so much increase is not necessary. A smaller blow would surely have been enough to boost the lira in the face of rising U.S. government bond yields.

Those familiar with the matter say that Agbal, who could not reach this article, knew that the measures of the rise would disgust the president. He was isolated from Erdogan for several weeks and knew that another big climb in March would not be his blessing, they say.

The Turkish press loyal to the president was intensifying criticism of his role. Yeni Safak, a pro-government newspaper, where Agbal’s replacement Sahap Kavcioglu he wrote a column, throwing a warning the day after the last rate hike. The newspaper accused him of serving “a hot owner who lives in London”.

Kerim Rota, a former banker who is now the future chairman of the future Conservative party, said criticism of Agbal had intensified at a press conference in late January by a senior newspaper columnist led by the former finance minister’s brother. Albayrak said employers were complaining about high rates.

Offshore night swap rate online chart (annual%) shows confiscated by Turkish money markets

“When Naci Agbal prevented the change of senior central bank staff in the first 100 days, people saw it as a weakness and started addressing it,” Rota said. “I knew his term would not be long. . . even though I never guessed it would be short. “

International money managers, however, received no sign that Agbal’s position was in immediate danger, dismissing the unrest as noise.

Agbal’s shooting broke markets, the lira fell 11 per cent this week and the Borsa Istanbul 100 stock index reached 9.6 per cent in the period. During Agbal’s tenure, $ 16 billion went into currency exchanges, leaving more than $ 6.5 billion in two days. Investors who bought local currency government bonds hit hard: 10-year bonds lost one-fifth of their five-day value. It was a tough race for the outings.

“What we are seeing now are capital door controls,” the former Turkish official said.

Diagram of the yield on the dollar bond maturing in June 2031 (%) shows that Turkey's borrowing costs have fallen

Analysts and investors say that when the markets opened on Monday, local Turkish banks made it difficult for foreign investors to withdraw from their positions in exchange for currency. To get the swaps out before the contract expires, as many have tried to do this week, they need to borrow the pound.

But the interest rates charged by Turkish banks on lira loans rose sharply 1,400 percent annually on Tuesday in a hurry of demand. Supply was also limited, as Turkish banks are limited by regulators in the amount they can lend. A Turkish investor at a foreign fund manager who was trapped this week said the reduced liquidity had an echo of the previous volatility surge. In 2019, for example, “there was oral communication [from the central bank] that every lira borrowed from a foreign counterpart needed approval, ”he said.

“We never got into domestic bonds, which has been a huge relief this week,” said Kieran Curtis, head of local currency debt at Aberdeen Standard Investments. “But we completely cut our lira positions in the swap. It wasn’t easy. It was expensive and there was not much liquidity or transparency in prices. Traders definitely made money when they took us out.”

Naci Agbal in her office in February 2021, and her successor, Sahap Kavcioglu, in less than two months © Reuters

Kavcioglu remains an unknown quantity, despite his clear sympathy for Erdogan’s unorthodox view of monetary policy. The U.S. economic recovery, which could still find a way to calm concerns, could fall against the dollar. He is expected to speak with international bankers and fund managers in the coming days, and has already said he intends to control inflation in his new role. Could not reach central bank for further comment.

Investors say the rate cut, especially before the next meeting scheduled for April, would provide a worrying sign of Kavcioglu’s intentions. They also agree that this latest shock would mean high borrowing costs to ease the risk of other disruptions.

“It’s too early to tell if we’ll go back,” Curtis told Aberdeen Standard. “You never say that. I am the manager of the emerging market bond fund and there is no limit to the menu of countries with no choice, especially one that has the potential to achieve very high returns. But it is a much more dangerous place than a week ago. ”

The accident also risks damaging Turkish businesses. “The net result has been a tightening of monetary conditions,” said Murat Gulkan, CEO of Istanbul-based OMG Capital Advisors. In cruel irony, this may make it difficult for businesses to borrow for investment, putting a stop to the growth that Erdogan seems so disappointed with.

Five-year CDS expansion line chart (basics) The cost of protecting against Turkey’s default debt has jumped sharply

Additional report by Eva Szalay.

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