Whatever impact August 13 “action plan” steps from the Turkish central bank had on addressing Turkey’s financial meltdown was more or less wiped out by comments from President Recep Tayyip Erdogan who deepened his country’s row with the US by accusing Washington of seeking to stab it in the back.

Erdogan, who says he sees Turkey’s economic woes as the result of a plot rather than economic fundamentals, told a news conference in Ankara: "You act on one side as a strategic partner, but on the other, you fire bullets into the foot of your strategic partner.

"We are together in Nato and then you seek to stab your strategic partner in the back."

The day’s market turmoil began during early hours Asia Pacific trading which sent the Turkish lira (TRY) down by 9% to a fresh record low of 7.24 to the dollar. It was trading at 6.8786, having weakened 6.94%, as of 15:00 local time. In the year to date, the TRY is now around 45% down against the USD.

Goldman Sachs said last week that a depreciation in the TRY to 7.1 against the dollar “could largely erode Turkish banks’ excess capital”.

Fears that Turkey’s currency collapse is set to within days cause a debt and liquidity crisis in the country were also on minds at the Istanbul stock exchange, where the benchmark BIST-100 index was down 3.4% to 91,715. The banking index slid 10.13%. The annual loss on the BIST-100 amounted to 21% versus the significantly higher decline of 43% y/y on the banking index.

Trading in Akbank, Yapi Kredi and Is Bankasi shares was temporarily halted by the circuit breaker following sharp declines.

The yield on 10-year benchmark domestic bonds tested a fresh all-time high of 22.69% while the 2-year benchmark yield saw as high as 25.98%.

The five-year credit default swap (CDS) spread reached as high as 562bps.

Turkey’s USD-denominated 2034 eurobonds fell 5.8 cents to 88.9 cents while the 2045 bonds were down 5.4 cents to 73.3 cents, according to Reuters.

State-owned lender Halkbank’s July 2021 issue lost 15.8 cents to a record low of 53.1 cents while Yapi Kredi’s December 2022 bond was down 12.3 cents to 59 cents in the dollar. Isbank’s June 2028 bond tumbled 19.5 cents to 42 cents. 

On the morning of August 13 morning, the Turkish central bank announced in a written statement that it had further cut reserve requirement ratios for all currencies in a move that would provide about TRY10bn, $6bn and $3bn worth of gold liquidity to the financial system.

In a separate statement put out during the morning, the central bank said that it would provide additional lira and FX liquidity to the system to support financial stability and sustain the effective functioning of markets.

No cause for jubilation
Traders and investors had no cause for jubilation.

“In the end all this is just window dressing… they need to hike rates to prove they get the problem, and they need to hike 500-1,000bps,” Timothy Ash of BlueBay Asset Management said in an emailed comment.

Referring to the dispute over detained US pastor Andrew Brunson—Donald Trump has demanded he be released rather than be tried in court on what the US contends are groundless espionage and terrorism charges—Ash said the success or otherwise of Turkey’s crisis measures “is dependent on the result of the spat with the US, and the decision is looming around Brunson at 6pm on Wednesday (August 15)”.

“No IMF [programme] is possible without a resolution with the US. The fact developments in Turkey are having an impact on global markets might encourage the Turks that European partners, and perhaps even the [United States Treasury], will step in to moderate Trump’s response. Good luck there trying to manage Trump. Let’s see if the Turks can get any financial backing from new friends and allies—China, Russia and Qatar. They need money pretty quick,” Ash added.

Meanwhile, four unnamed bankers told Reuters that the central bank was preparing to provide liquidity to Turkish lenders at the overnight rate of 19.25%, a sign that the authority was returning to its unorthodox interest rate corridor policy only two and a half months after simplifying it.

The central bank did not on August 13 open its regular one-week repo auction in which it provides liquidity at its main policy rate of 17.75%.

The bank decided not to fund at its policy rate due to unhealthy price formations and excessive fluctuations in the market and it was unlikely to open its regular repo auction in the coming days until such movements in the market eased, according to the unnamed bankers.

“The liquidity need for today is only a few billion lira... So we can’t say, only based on today, that the central bank has shifted to its old corridor policy... We will see if that is the case by Friday,” an unnamed foreign exchange trader was quoted as saying.

Defiant tone
Erdogan, who espouses an orthodox brand of economics that contends Turkey, even in its current dilemma, needs interest rate cuts rather than hikes, kept up his defiant tone. As well as blasting the US for the economic sanctions related to Brunson and the announcement of new metal tariffs—Trump announced the tariffs at a point on August 10 that caused the lira to spiral even further downwards—Erdogan remarked that he expected the “economic attack” to continue but the currency to stabilise soon. He also insisted that despite all the pressure Turkey would not retreat from running a free market economy.

Erdogan also reiterated praise for Turkey’s new allies Russia and China. He described the spreading of what he said was fake news about the Turkish economy as “treason” and those spreading it as "economic terrorists".

With fears over a bank run mounting, Turkish authorities, including the public prosecutor’s office in Istanbul, the interior ministry, communications watchdog BTK, the financial police and the financial crimes investigation agency (MASAK) launched investigations into “social media provocations”. The interior ministry said it was taking legal action against 346 social media accounts it claimed had posted comments about the weakening lira "in a provocative way".

“The government only has a few days to stem the crisis,” Fiona Cinoctta of City Index warned. “The slump in the lira could prompt some companies to default on their USD loans, triggering a domino effect.”

She added: “For the time being Turkey’s financial crisis looks localised but the country’s central bank has perhaps only days to stop the decline of the currency before the lira’s freefall results in loan defaults, starts seriously affecting the country’s financial system and potentially starts spilling over onto European banks.”