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Turkish lira at new low

Erdogan’s cabinet reshuffle fails to calm market as it retreats 1.1%

Turkish central bank Governor Erdem Basci’s attempt to buy himself time to boost the lira amid a corruption probe took a beating after a third minister resigned and urged Prime Minister Recep Tayyip Erdogan to do the same.

The lira weakened 0.4 per cent to an all-time low of 2.1038 per dollar on Thursday, following a one per cent decline on Wednesday after Environment and Urban Works Minister Erdogan Bayraktar stepped down. The Borsa Istanbul 100 Index retreated 1.1 per cent to the lowest level in almost four months as of the 12:30pm midday break. Erdogan responded to the political turmoil with a cabinet reshuffle on Wednesday, replacing 10 ministers.

Governor Basci stepped up efforts to stem the currency’s slide after police arrested the sons of two Turkish ministers and a bank chief December 17 and the Federal Reserve said the next day it will cut its $85 billion monthly bond-buying program by $10 billion. Turkey’s central bank said December 24 it would sell at least $6 billion through the end of January and make it more costly for lenders to park foreign currencies in its coffers.

“Minister Bayraktar’s surprise statement has nullified Basci’s efforts,” Haluk Burumcekci, chief economist at Burgan Securities in Istanbul, said by phone. “Prime Minister Erdogan didn’t directly respond to that call for him to quit, but that may change in the following days.”

Erdogan replaced Bayraktar, along with Economy Minister Zafer Caglayan and Interior Minister Muammer Guler, after changes to 10 cabinet members were approved by President Abdullah Gul late Wednesday. Among other ministers who were replaced was Egemen Bagis, the EU affairs minister who has also been implicated in the corruption investigation, according to Hurriyet newspaper on December 19.

The lira, this month’s worst-performer in emerging Europe and Africa, rallied one per cent on December 24 after Basci announced the new tightening measures. The gains initially continued on Wednesday after the resignations of the economy and interior ministers, whose sons were arrested last week as part of the corruption investigation, before reversing. The stock index also rallied as much as 1.3 per cent before retreating.

The resignations had raised optimism they would “somewhat lessen the political tensions,” Burcin Metin, head of currency trading at ING Bank in Istanbul, wrote in e-mailed comments.

The investigation is a “light, temporary breeze” for Turkey, Nihat Zeybekci, who replaced Caglayan as economy minister, told Bloomberg by phone on Wednesday.

“Turkey right now has one of the world’s strongest economies,” Zeybekci said. “Our economy will quickly become better under the leadership of our prime minister.”

Shares, bonds and the currency swung lower after Bayraktar, the environment minister, said in an interview with NTV television that all of his actions had Erdogan’s approval and the prime minister should also resign amid the probe. The stock index ended the day 4.2 per cent lower. US and European markets were closed for the Christmas holiday on Wednesday.

“This latest resignation shows the debate will continue,” Evren Kirikoglu, a strategist at Akbank TAS in Istanbul, said in an e-mail. “Foreign investors view this as an indication that the parties subject to the probes are not in agreement among themselves.”

In a bid to buttress the lira on Wednesday, the central bank sold $450 million at a currency auction. It was to sell at least $450 million yesterday for a third consecutive day in what will be the biggest three-day amount sold since the sales started on June 11.

The lira depreciated less than 0.1 per cent to 2.0964 at 2:03pm in Istanbul, extending its decline this year to almost 15 per cent, the fourth-worst performance among 24 emerging- market currencies tracked by Bloomberg.

Turkish assets were further pressured this month on concern that a power struggle between the government and followers of US-based Islamist cleric Fethullah Gulen, who has a wide following in the police and judiciary, will escalate.