​A few thoughts on the recent market turmoil

TURKEY - In Brief 26 Mar 2019 by Murat Ucer

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Turkish markets have gone wild again in the past few days, which started with a sharp depreciation of the lira on Friday, when the currency weakened by about 5%-6% against the dollar on a single day. In response, the CBRT has decided to tighten liquidity over the weekend, altogether cancelling lira funding through the weekly repo window. To recall, all the market’s funding needs were being met in the weekly repo market since the fall of last year, when the CBRT, after much delay and resistance, had raised the weekly repo rate by 625 bps to 24%. The Bank’s tightening drove local rates somewhat higher, with some banks reportedly experiencing settlement problems, but more dramatically, interest rates in the cross-currency swap market shot up to over 300% -- because onshore and offshore markets are largely disconnected at this point, as per restrictions imposed over swap transactions since last August.So, what happened? And is it over, now that the USD/TL has been back to below 5.5 at this writing? On the first question, two triggers seem to have perturbed an already fragile and tenuous equilibrium in the foreign exchange market: 1) the escalating S400 tension with the US/NATO, which risks, potentially, another “Pastor Brunson crisis” (click here and here), and more recently, 2) the market’s discovery of the sharp drop in CBRT reserves, about which we wrote last Sunday (see Groundhog Day, March 24, 2019). As regards the latter, recall that the CBRT's net reserves have declined by some $8 billion in the past two weeks or so (including another $2 billion or so loss last Friday), which smacked of indirect intervention by CBRT through state banks, against which the Bank has of...