Turkey’s Erdogan blames speculators, U.S. dollar for lira fall

He stopped short of outright criticism of the central bank, giving the lira a brief boost after it hit another record low

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Turkish President Tayyip Erdogan accused a “lobby” of speculators on Friday of deliberately battering the lira currency, saying he would discuss the record sell-off with his economic czar and embattled central bank governor.

But he stopped short of outright criticism of the central bank, giving the lira a brief boost after it hit another record low. His recent withering attacks on monetary policy have raised investor fears about government interference in the bank.


Facing flagging growth and with June elections looming, Erdogan has fulminated against interest rates he says are too high, adding anyone who defends high rates is guilty of “treason.”

The rhetoric has fuelled uncertainty about the future of Central Bank Governor Erdem Basci and economy czar Deputy Prime
Minister Ali Babacan, both seen as anchors of economic stability.

“There is the known work of the interest rate lobby and the latest developments are completely due to dollar-euro moves,”
Erdogan told reporters in Ankara. “Those who invest excessively in the dollar may end up being stranded.”

The lira has fallen around 13 percent against the dollar this year, making it the second-worst performer among 10 major emerging market currencies, according to Thomson Reuters data. Only the Brazilian real has fared worse.

The lira firmed against the dollar after Erdogan's remarks but later weakened to a record low of 2.647 after solid U.S. jobs data.

The currency’s reaction to Erdogan was “encouraging,” said Timothy Ash, the head of emerging markets strategy at Standard Bank in London, adding the comments were “hopefully an attempt to ease back tensions with the central bank.”

In another potentially encouraging sign for investors, Deputy Prime Minister Bulent Arinc called for an end to political pressure on the central bank.

“I don’t think it is right to say to the central bank: ‘You are acting incorrectly,’ going outside legal boundaries and intervening in their duties,” he told broadcaster NTV.

“Perhaps he should just leave it at providing his advice.”

New York state of mind

Ankara has had little luck so far in calming investors - or some average voters.

“The politicians always talk about the interest rate lobby and the parallel structure and blame our economic problems on these two things,” said Berat Tasci, a 38-year-old baker who was eating a kebab outside a shop in Istanbul's conservative Fatih district.

“I don’t buy it. I don't believe the Turkish economy is so easily influenced by these external forces.”

Prime Minister Ahmet Davutoglu and other members of the economic team have been meeting fund managers and bankers in New York over the past two days, in an attempt to allay concern about Erdogan’s battle with the central bank.

Those meetings have been less than convincing, according to some bankers who took part.

“Nobody asked particularly tough questions because the investors were aware that it's Erdogan who calls the shots,” said one banker briefed by a colleague who attended one of the meetings, describing the tone as “formal and polite.”

Deputy Prime Minister Babacan, who has led similar investor meetings in the past, was uncharacteristically quiet, the banker said. His defense of the central bank has made him look increasingly unlikely to return after the June general election.

“There was nothing really very convincing that suggested things are on track,” the banker said.

Babacan has been a prominent figure in Turkey’s economic management team for more than a decade and is widely respected in financial markets. His departure would be a further knock to investor confidence.

Erdogan said both Central Bank Governor Basci and Babacan had requested talks with him and that they would meet after
Babacan’s return from New York.

Some political and market sources say Ibrahim Turhan, a former deputy central bank governor and ex-chairman of the Istanbul stock exchange, is being groomed for a possible role in a new economic management team. Turhan was among the members of the New York delegation.

Unable to hike rates to defend the lira because of the political pressure, the central bank tightened liquidity on Friday by providing less lira to the market through its repo auction.

It injected 20 billion lira, some 5 billion short of market requirements, in a move some analysts dubbed a “covert rate hike” and which pushed overnight interest rates up to 10.6 percent from 10.3.

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