Now that planet Earth has finally woken up to how Turkey’s economic maladies are far from over let’s try to fill in some gaps in the story and assess what’s coming next.

Although the head of the Turkish banking association made a ponderous denial that domestic banks were deliberately withholding Turkish lira (TRY) from foreign lenders, three unnamed Turkish sources familiar with the matter contradicted that seemingly ludicrous assertion, telling Reuters on March 27 that Turkish banks would continue preventing lira liquidity on the London swaps market at least until after the March 31 local elections were over and done with.

“These sorts of steps aren’t policies that can implemented in the long term. They are done for 10-15 days and during speculative attacks,” one of the unnamed sources reportedly remarked, just in case Turkish President Recep Tayyip Erdogan’s decision to enter into hand to hand combat with global finance (did anyone advise the chap that even a short bout “might, er, prove pyrrhic, Sir”?) had left markets players doubting what they thought they knew about financial literacy.

“Grand Gathering of Trabzoners”
One man who shows no inkling of doubting his own financial nous (at least not in public) is Erdogan’s son-in-law and finance minister since last July Berat Albayrak. The March 26 itinerary of Albayrak, who hails from the city of Trabzon in Turkey’s northeast, produced a curious incident at a “Grand Gathering of Trabzoners” held in Sinan Erdem Sports Hall in Istanbul with his father-in-law in attendance, reported by state-run news service Anadolu Agency (global media do not show the level of interest Albayrak’s performances deserve). Event-goers looked on as Albayrak asked his fellow countrymen to check the latest lira-to-the-dollar rate on their smartphones. Jocularly dismissing those Turks fretting that the lira might be on the way to eight or 15 against the USD, Albayrak declared that “God willing” the fightback against the USD would soon lead to an even more muscular domestic currency.

Erdogan, who has some oddly muddled info in his biography that shows him graduating from Marmara University's Economic and Commercial Sciences Faculty in 1981, one year before the faculty in Istanbul was formed, has—furiously busy with all manner of matters of state as he has been for nearly 17 years—not had time to stay au fait with modern fast-moving swaps markets, but Albayrak, who has lectured in banking and finance at Marmara University according to the Treasury’s revamped website, should be on hand to explain the intricacies. There again, he might have a tough job on his hands come the potentially horribly dicey period after the elections outlining just why it is that the lira is back on the run and why some bold policy rate hikes might have to be rolled out like big cannon.

Ready to deliver. But what?
Meanwhile, Senol Kazanci, general manager of Anadolu Agency, has been letting folk know that his news service is ready to deliver on election night. Nothing wrong with that, you might say, but the agency didn’t exactly come away smelling fragrant from last summer’s snap presidential and parliamentary polls, having accidently aired election results during a test broadcast three days before votes were even cast—results, we must surely add, that proved to be almost entirely accurate. Ahem.

Back to the winners and the losers so far in the lira showdown and Turkish daily Hurriyet on March 27 quoted an unnamed banker as saying that some lenders that attempted to short the lira last week—including Citibank, JPMorgan Chase and Deutsche Bank—could not have closed their short positions and might be temporarily or even permanently banned from the payments system.

There was also confirmation of speculation that public lenders had left officials on night duty to defend the lira during shallow trading hours. Local business daily Dunya brought that particular bit of news from the off-the-record side of the monetary moon.

Rolling out an optimist, daily Sabah on March 27 reported remarks from Isbank general manager Adnan Bali in which he said that Turkey has always managed to pull another rabbit from its hat when need be and that things would get back on the rails with a gradual recovery in the second half.

Aunt Ayse playing the markets
Bali previously drew attention by questioning what business Aunt Ayse (an idiomatic character in Turkish referring to an ordinary Turkish citizen) had with forex. Those comments were made in an interview he gave during the currency crisis that hit its nadir last August, but later in the month, Bali, realising he’d put his foot in it, reversed track and advised that currency developments were indeed causing impoverishment for the working class. Erdogan has not bashed Isbank in his election rally rhetoric since last month.

March 27 also saw ‘the other half of Turks’ discussing the different exchange rates on the markets for the first time since the lira became convertible in 1989. An unnamed banker told Reuters on the day that locals had bought $2.5bn worth of USD in just the past two days.

Over on the London front, all market players seemed to be in agreement that the Erdogan operation had produced “the highest swap rates” they had ever encountered in their careers. The word “gravity” must have been on the tips of many tongues. What goes up can unerringly come smashing back into the ground.

No doubt there is much weeping and gnashing of teeth among those bankers who got locked out with short lira positions, and some layoffs may well be on the way. Beyond the monster hitters who are too big to be left too far on the wrong side of an abrupt policy shift, there must be plenty of market participants who are thinking of entirely kicking the lira out of their lives. Scram, get out of my sight! However, it should also be noted that given the anticipated huge volatility looming on the horizon for Turkish assets, many an oath may be broken soon.

Sold everything they had
As might be expected after the sudden turn of events, those shorting the lira sold everything they had in lira assets—equities, bonds, CDS, and so forth—to close out their positions because there was no lira left to be had in London once Erdogan’s boys had gone to work.

Lifting his binoculars, Julian Rimmer of Investec on March 27 said in an emailed note investors: “Lord knows what happens on Monday [after the elections] when suddenly the Turkish rug is pulled from underneath the lira and I suppose the issue is to determine how far the TRY will fall when a gun is not pressed to the head of fx traders. No further elections in the Turkish cycle for four years. All dictators are ever looking to buy is time. I remain bearish on the lira and the equity mkt and recommend only lira hedges, although even they aren't faring so well because selling is indiscriminate and you can only sell what you own.”

“If they come to the market, there will be a price for them… There may come a time when the markets get completely squeezed,” Nick Eisinger of Vanguard Asset Management told Bloomberg.

“Hardly the first dumb thing”
“As usual in these situations, there is a pervasive lack of understanding by headline writers about what is happening in Turkey. The current mess hurts mainly if you have borrowed lira ST in the offshore market to fund other TRY fixed income positions & now need to roll funding,” Will Slaughter of Northwest Passage Capital Advisors complained in a series of tweets, adding: “Erdogan is crucifying the offshore TRY money markets (mainly populated by hedge funds and/or dedicated EMFX funds) to buy some short term currency stability that will certainly be unwound in a few days or weeks… It is probably stupid to destroy the offshore money market infrastructure for this purpose (given that many participants are ultimately a stable source of finance for Turkey), but this is hardly the first dumb, counterproductive thing Erdo has done in the financial sphere.”

Paul McNamara of GAM Investments became the latest market figure to achieve fame among Turkish Twitter users with his comments on the skyrocketing swap rates. He was also getting the treatment from Turkish government trolls, becoming familiar with Silivri prison jokes.

“Just i seem to have offended enough lightbulb types as it is,” he wrote. The lightbulb is the logo of Erdogan’s ruling AKP party.

“For any fund that has any Turkey exposure, VAR levels will now have shifted significantly. This means that such funds will be pressured to reduce risk elsewhere until any Turkey exposure is closed. Although, the situation in Turkey has not evolved suddenly and it's unlikely that any but dedicated EM funds have much exposure,” Marck Cudmore of Bloomberg commented in a note.

Horrible miscue
In further remarks on what’s widely taken as a horrible miscue from Erdogan, which has involved him threatening bankers with post-election probe ‘conclusions’, Swatha Pattanik of Reuters, in a note entitled “Turkey’s attack tactics are the worst form of defence”, said the executive president had chosen to win a battle rather than the war by withholding lira liquidity and cracking down on bank research.

Pattanik added: “Many banks already had imposed restrictions on talking to journalists about Turkey. They may now grow even more tight-lipped with clients and hesitate to issue research on the country or its companies, especially by experts on the ground... Credit or equity investors based overseas may struggle, however, to replicate the sort of granular knowledge they get from local analysts. Ignorance is rarely bliss in markets. Erdogan’s clampdown may therefore ultimately persuade more money to flee the country.”

Timothy Ash at Bluebay Asset Management was also feeling pretty down about Erdogan. He wrote in a note to investors: “What is now self evident is that the over concentration of power in the [first Turkish] Executive Presidency [initiated last summer] means that there are few checks and balances within the system while greater authoritarian trends domestically have weakened the press and other checks in the system and society. The market is now the only check left and it is providing the balance but painfully so.”

He added: “Now officials argue that the above policies are just temporary and policy will be normalised after the local elections. They also argue that given the depth and severity of the ongoing recession it’s rational for the government to loosen fiscal policy, and especially given the health still of the public sector balance sheet, they have fiscal space to loosen. There is clearly some logic in this, but given the core of the issue in Turkey is confidence in the credibility of economic policy making, this seems like a risky strategy. Time will tell here, albeit developments this week suggest that policy makers ran out of time, and the market simply lost confidence in the policy response.”

The policy response to last week’s lira sell-off was extreme and panicked and would ultimately prove counterproductive, Ash concluded.

“Turkish policy making is in crisis”
“Breaking the offshore swap market, in effect, and making it very difficult for foreigners to hedge their investments in TRY instruments, will likely just put off many foreign investors actually wanting to put money to work in Turkey—a case of throwing out the baby with the bath water, this is an extreme move to prop up the lira in the short term but which will have extremely negative consequences over the longer term. And in general it just sends a message that Turkish policy making is in crisis—not just the Turkish economy,” Ash also said, adding that he wanted to see “astute and capable policy makers” and that he hoped that “as political tensions ease after the local elections, some normalisation in policy will return”.

Well that’s right, say the cynics (“Moi!?”), Turkey’s next hot money borrowing cycle has already been named “normalisation”, and it seems that a new finance minister to replace what would be a very short-lived Albayrak could be among the “normalisation” demands.

“Whatever the result of the local elections Turkey needs the A-Team in terms of policy and there is now zero scope for policy error. They can manage thru this without the IMF but it needs perfect policy orientation and they need to work with, not against, the market,” Ash wrote on Twitter.

Conform with such an ‘offer’ and might the Erdogan administration be able to board the lira for another roller-coaster ride? Never say never in global finance, but the most likely scenario now is perhaps that Erdogan, with no elections ahead of him for a few years, swallows his pride and heads to the IMF for a bailout.

Toll on growth
While market players get headaches over the rising risks in exposure to Turkish assets, the macro analysts are focusing on what toll the ongoing financial turmoil will take on the growth outlook, with Turkey already knee deep in a recession.

Despite the lira relief brought about by the full frontal attack on the shorts, financial conditions remain much tighter than they were at the start of last week (albeit still much looser than they were during the worst of the lira collapse last August). Those conditions point to continued weakness in domestic demand, William Jackson of Capital Economics advised in a research note.

“The central bank’s [backdoor] move to tighten monetary conditions has raised the average cost of central bank liquidity provision by about 150bp. Long-term bond yields have risen. And Turkey’s country risk premium has increased sharply—five-year CDS premium have risen by over 100bp since the start of last week. Indeed, the scale of the tightening of financial conditions is similar to that during the 2011-12 euro-zone debt crisis,” Jackson observed.

The current state of things as measured by the financial conditions seemed to be consistent with domestic demand falling at roughly the same pace as it did in Q4, according to Jackson. But Capital Economics has said it sees the economy starting to recover over the coming months.

It should be noted here that official figures pointing to falling inflation and the bottoming-out of industrial production could be positive for on-paper calculations. But their impact on real economy dynamics and domestic demand could be misleading.

Bouts of risk aversion
According to Jackson, one point that comes out of the recent turmoil is that, despite the adjustment in Turkey’s current account, local assets remain particularly vulnerable to bouts of risk aversion due to concerns about the direction of policymaking and the still large external financing requirement for rolling over maturing external debts.

Capital Economics also expects risk aversion to rise over this year as a result of weak global growth. “One consequence is that, while the lira is unlikely to suffer falls on anywhere near the scale seen last year, it is likely to weaken,” Jackson said, adding that in any case “rising risk aversion is likely to cause financial conditions to tighten and dampen the pace of the recovery”.

Also not to be neglected is the fact that, taking the magnitude of market players’ current troubles with the lira into account, you just cannot rule out the lira weakening to the levels pinned on the chart back in the thick of the currency crisis. It’s bold to assume you can.

“The Turkish Lira has stabilized and is back below our fair value of 5.50 for $/TRY. But the underlying reality is that Turkey is suffering its second sudden stop in less than one year. Interest rates are up to levels seen during last year's sudden stop and will weigh on activity,” Robin Brooks of the International Institute of Finance (IIF) said on Twitter, adding: “Turkey's current account & balance of payments have adjusted hugely since last summer, so why another sudden stop now? The underlying issue is international capital markets are unwilling to finance the growth targets desired domestically. So the underlying issue is about growth.”

Meanwhile, on the external debt rollover front, Akbank has been rather lucky to strike a last-minute deal to obtain a $700mn 367-day syndicated loan. It advised of the success in a March 27 bourse filing. The $356mn tranche has a cost of Libor+2.50% while the €303mn tranche is pegged with Euribor+2.40%.

Akbank’s syndicated loan renewal costs last year rose by 140bp to Libor+275bp and Euribor+265bp in September compared to April. Akbank launched the initial refi at $600mn but it has closed an oversubscribed loan in welcoming eight new banks to the syndicated loan, kick-starting the refinancing season for Turkish banks, Global Capital reported on the day.

Turkish lenders taking part in the upcoming syndicated loan renewals season can now easily expect much higher spreads on market rates.

Investors were troubled by Erdogan’s control measures on Turkish banks lending lira, while there were plenty more Turkish borrowers still to come into the eurobonds market so well enjoyed by their peers recently, according to another report in Global Capital.

“Turkey has had a sensational quarter, with borrowers from the country raising more than $10.2bn in the market—the highest total in history. But with its central bank appearing to flounder and its currency struggling to hold onto its gains, Turkish issuers’ best funding days may be behind them,” Lewis McLellan of Global Capital commented in a separate piece entitled “The bargain bonanza is over—Turkey’s appeal is fading”.

Turkish paper “losing its shine”
McLellan added: “After a record period of Turkish borrowing, investors’ lines are groaning with paper. Still, there is more to come. The sovereign is rumoured to be eyeing more than its $8bn programme and plenty of banks have debt to refinance. Let’s hope investors’ appetite for the country can be stretched a little further. Turkish paper appears to be losing its shine.”

However, Mariam Meskin of the same publication was more positive on Turkish lenders in her commentary entitled “Turkish fears re-intensify, but banks remain unscathed”, writing: “Bankers remain confident that Turkey’s ‘resilient’ banking system will weather increasing political and economic volatility, as the country enters a recession and approaches local elections.”