The stock market and foreign exchange markets continue to plummet! The Turkish government is in a hurry, 26 people are criminally charged, including 2 former central bank governors

“Double killing of stocks and exchanges” is still Turkey’s nightmare.

Faced with the plummeting stock market and foreign exchange market, the Turkish government is a little anxious. The country’s banking regulator said it would file criminal charges against 26 people, including two former central bank governors, for trying to manipulate currency movements, violating provisions of Turkey’s banking law.

Recently, the Turkish lira has fallen sharply against the US dollar again. It fell by more than 8% on December 27 last year, and then fell all the way. The cumulative decline in the past 10 trading days is close to 24%, while the depreciation rate for the whole year of last year exceeded 43%. One of the worst emerging market currencies in the world.

It wasn’t just the exchange rate that was turbulent, the Turkish stock market was not immune. Since December 17 last year, the Turkish stock market has continuously crashed, and 7 circuit breakers have been staged in 4 trading days. During the period, the largest single-day drop exceeded 8.5%, and the cumulative decline of the latest high closing price exceeded 16.7%.

The Turkish government is in a hurry

The huge earthquake in Turkey’s foreign exchange market and stock market continued, making the Turkish government “restless”.

Turkey’s regulators may set off a regulatory storm. Recently, Turkey’s banking supervisory agency publicly stated that it will file criminal charges against 26 people, including two former central bank governors, opposition lawmakers, economists, and media commentators, accusing them of trying to manipulate the lira exchange rate The social accounts of the above-mentioned individuals took the measures after they posted remarks through social media that were damaging to the Turkish government.

Turkey’s banking regulator said the aforementioned individuals attempted to manipulate currency movements in violation of Article 74 of the Turkish Banking Law, which disseminates through public channels “baseless allegations that may damage or tarnish the bank’s reputation.” Separately, the complaint is based on a provision of Turkey’s Securities Law that prohibits the media from making statements that could damage or damage the bank’s reputation.

According to the detailed list disclosed by the regulator, the two former central bank governors indicted are Durmus Yilmaz and Rusdu Saracoglu, who served as governors of the Turkish central bank from 2006 to 2011 and from 1987 to 1993, respectively.

Among them, Durmus Yilmaz publicly stated in an interview on December 20 that the rise of the Turkish currency that night and the depreciation of the dollar provided an opportunity to “buy the dollar and sell the lira”.

Turkey’s President Recep Tayyip Erdogan then slammed the former governor for “manipulating financial markets” and warned that the manipulators “will pay a price” and banking regulators have taken the necessary steps.

In fact, Erdogan’s relationship with the former head of Turkey’s central bank has always been very tense. In just two and a half years, Erdogan has fired three central bank governors in a row due to policy differences.

Analysts believe that such differences and personnel turmoil have seriously damaged the credibility, independence and predictability of the Turkish central bank’s monetary policy. Foreign investors have continued to sell Turkish assets in recent years due to concerns about the central bank’s independence.

The current storm of lawsuits by Turkish regulators may quell criticism of the Turkish government’s unorthodox economic policies, but it does not appear to have done much to stabilize Turkey’s exchange rate.

Turbulent stock market, foreign exchange market

The devaluation of the Turkish lira continues. In the past 10 trading days, the lira has fallen by nearly 24% against the US dollar, and the depreciation rate for the whole year of last year was more than 43%, making it one of the most tragic emerging market currencies in the world.

Before that, the Turkish lira suffered a depreciation storm that plunged 8% in a single day. If the time period is lengthened, the depreciation of the lira is even more severe. It has experienced a decline for several months. In December 2021, it was once It plummeted to an all-time low of 18.4 lira per dollar.

The momentum of the lira’s sharp depreciation again has made the Turkish government very nervous. Because, before that, the Turkish government has used a series of unconventional means to try to stabilize the lira. Turkish President Recep Tayyip Erdogan has announced a “deposit protection plan”, that is, after residents who hold the country’s sovereign currency deposit money in the bank, the difference between the exchange rate depreciation and the deposit interest rate will be covered by the government. In this way, when the depreciation is smaller than the official interest rate, it can also ensure the interest promised by residents when they get their deposits.

At the same time, Turkey’s state-owned banks dumped large amounts of dollars into the market to stabilize the lira. Turkey’s Finance Minister Nebadi said Turkey was “using all the tools at its disposal in a positive way”. The country’s central bank’s net foreign exchange reserves fell to $12.2 billion as of Dec. 17 from $21.2 billion a week earlier, reaching levels last touched in May.

After the implementation of a series of rescue policies, the Turkish lira rose against the US dollar for 5 consecutive days, with a cumulative rebound of 54%, but the good times did not last long. Since the end of December last year, the depreciation momentum of the lira has spread again.

HSBC said in its latest report that the lira may continue to fall against the dollar if the Turkish central bank’s foreign currency selling diminishes, with Turks continuing to buy foreign currency despite official reassurances.

If confidence in the lira collapses, a large number of Turkish depositors may withdraw dollars from the banking system, which is perhaps the most worrying thing for the Turkish government.

It wasn’t just the exchange rate that was turbulent, the Turkish stock market was not immune.

Since December 17, the Turkish stock market has crashed continuously, with seven circuit breakers in just four trading days, with the largest single-day drop of over 8.5% during the period. As of press time, Turkey’s benchmark index – Turkey’s Istanbul 100 Index was at 2005 points, a cumulative decline of 16.7% compared to the high point on December 17.

In the first 11 months of last year, the Turkish stock market soared all the way, boosted by the crazy interest rate cuts by the Turkish central bank, with the largest gain during the period of nearly 63%.

How come?

The reason for Turkey’s increasingly fragile financial system is closely related to the uncontrolled release of water. The rate cut on December 16 last year was the trigger for the market crash in Turkey.

On the same day, the Central Bank of Turkey announced a reduction of the benchmark interest rate by 100 basis points to 14%. Since September last year, Turkey’s central bank has cut its benchmark interest rate by 500 basis points, and Turkey’s real interest rate has fallen further into negative territory.

In the case of “exploding” inflation, he still chose to cut interest rates sharply, which made Turkish savers’ confidence in the lira plummet, and began to frantically sell the lira and exchange it for hard currency such as the dollar. The Turkish central bank’s foreign exchange reserves showed a net negative value. The market is worried that if Turkish residents continue to exchange dollars, it may lead to the collapse of Turkey’s financial system.

More and more financial analysts point out that whether the current Turkish lira depreciation crisis will continue to spread will largely depend on whether the country’s banking system can hold up.

Another risk point for Turkey is the continued “outrageous” inflation. Turkey’s inflation rate soared to 36.1 percent in December 2021, the highest since September 2002, and well above analysts’ expectations, data released by the Turkish Statistical Institute showed.

Some analysts said that Turkey’s overall consumer price inflation is expected to be pushed up by a maximum of 10 percentage points, and inflation may exceed 30% next year. Standard & Poor’s lowered its outlook on Turkey’s sovereign credit rating on Friday, citing the central bank’s choice to cut interest rates even as inflation accelerates. S&P said the current monetary easing and the sharp depreciation of the Turkish lira will further drag on inflation, which could peak at 25%-30% year-on-year in early 2022.

The country’s real inflation rate is likely already as high as 137%, according to a model by Johns Hopkins economics professor and Nobel laureate Steve Hanke.

In fact, since 2014, the Turkish government has been printing money continuously, and the money supply has grown at a rate of 20% every year; at the same time, under the condition of high debt, Turkey is also engaged in infrastructure and real estate. By the end of 2020, The country’s foreign debt reached $450 billion, or 62 percent of its GDP.

The ever-easy monetary policy is almost entirely dominated by Turkish President Recep Tayyip Erdogan, who firmly believes that cutting interest rates is the way to reduce inflation, not raising them. It has long called for monetary stimulus to boost credit, exports and employment.

At the beginning of December this year, Erdogan again “fired” the finance minister and appointed Nabati, who he trusts, as the new finance minister. And Nabati is a staunch defender, having publicly defended Erdogan’s rate-cut policy on several occasions. This also allows the ultra-easy monetary policy that Erdogan insists to continue to be implemented smoothly.

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