Turkish Markets Sink After Erdoğan Fires Top Banker

Lira plunges again after Erdogan cites Islam to defend rate cuts

Ankara, March 22 (AFP/APP): The Turkish lira and stocks plunged Monday as officials tried to stem the carnage caused by President Recep Tayyip Erdoğan’s abrupt dismissal of his reformist central bank chief.

The lira lost nearly 15 percent against the dollar on the first day of trading after Erdogan replaced market-friendly economist Naci Agbal with former ruling party lawmaker Sahap Kavcioğlu at the crucial post. It clawed back some of its losses but was still down nine percent at 7.93 to the dollar late Monday after analysts said state banks intervened to support the lira by selling foreign currencies.

David Madden of the CMC Markets brokerage in London said the rout was driven by “fears that Turkey will impose capital controls” while Capital Economic pointed to banks laden with foreign currency debts as “a key area of vulnerability”. The turmoil carried over to the Istanbul stock exchange. The Borsa Istanbul suspended trading twice when automatic circuit breakers kicked in as the broad market ended the day down 9.8 percent.

Yields on Turkish bonds reached record highs and people on the street worried about their savings being wiped out by Erdogan’s decision to fire the man credited with righting the economy in his four months on the job. “Supporting the government doesn’t mean turning a blind eye to its mistakes,” Sukru Kocak, 36, said on his way to work in downtown Istanbul.

Lack of predictability

The violent market reaction underscored the trust Agbal had won from investors after years of what many Western analysts view as mismanagement by Erdogan’s economic teams. Moody’s ratings agency said the sudden change offered “further evidence of the complete lack of policy predictability in Turkey and confirms our view of serious institutional weakening”.

Erdoğan is known for his unconventional belief that high interest rates cause inflation — instead of tamping it down — and has placed a heavy emphasis on keeping them low to support growth. The result saw the Turkish economy expand by 1.8 percent last year despite the pain of the coronavirus pandemic. But the annual inflation rate also shot up to 15.6 percent by February and the Turkish lira lost nearly a third of its value against the dollar from the start of 2020 to the day of Agbal’s appointment in November.

He used his term to aggressively raise the main interest rate and promised to keep it high for as long as needed.

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