Cablegate: Turkey: Lira Depreciates Sharply


DE RUEHAK #1864/01 3010526
R 270526Z OCT 08



E.O. 12958: N/A

B. ANKARA 1820
C. ANKARA 1763
D. ANKARA 1744

1. Sensitive but unclassified. Not for internet

2. (SBU) Summary: The Turkish lira has taken a pounding,
falling 37% against the dollar this month and 14.5% from
October 20 to 24. The lira's sharp fall is mainly the result
of foreign investors selling Turkish assets (USD $14 billion
capital outflow since October 1) and of Turkish companies and
banks buying foreign exchange to make foreign currency debt
payments. Thus far, the depreciation has been orderly and
banks are not reporting a movement by Turks out of the lira
and into foreign currency. The GOT continues to publicly say
that the crisis will not directly affect Turkey or Turkish
banks, while at the same time proposing various measures in
response, the most substantive being incentives for Turks to
repatriate offshore funds. Meanwhile, the Central Bank (CBRT)
has quietly instituted several measures aimed at heading off
a FX liquidity shortage. On October 9, it assumed
counterparty risk in the interbank FX market (reftel C). On
October 24, it doubled the amount of FX that local banks
could borrow from the Central Bank on a short-term basis and
reinstituted daily FX auctions. The CBRT's focus is on
maintaining FX liquidity, not supporting the exchange rate.
The Bank's Monetary Policy Committee (MPC) declined to
support the lira with an interest rate increase on October
22. The MPC statement indicated that the Bank recognizes the
inflationary impact of the lira's depreciation, but felt it
would be largely offset by falling energy and food prices.
End summary.

3. (SBU) The Turkish lira has depreciated sharply as foreign
investors, banks and local companies adjust their
expectations in response to the global financial crisis. The
lira fell 14.5% against the dollar in the first four days of
this week, October 20 through 24. Through October 24, the
lira has lost 37% this month. The depreciation was driven by
investors selling off Turkish assets, particularly hedge
funds that had taken large lira positions as part of carry
trades (the Central Bank's Markets Department estimates the
capital outflow from Turkey at USD $14 billion since October
1), and by Turkish banks and companies buying FX in
anticipation of large FX-denominated debt payments coming due
in the next two months.

4. (SBU) The GOT continues to take the public position that
Turkey does not need to take any extraordinary measures in
response to the crisis, while at the same time proposing
various measures to respond to the effects of the crisis
(see reftels B, C and D), the most substantive of which is a
proposed new law giving incentives for Turks to repatriate
funds held offshore. On October 24, Treasury Minister Simsek
rejected business sector calls for the GOT to negotiate a new
IMF Standby Agreement, saying the GOT "does not currently
feel the need for a new accord that would involve the use of
new funds from the IMF," but left open the possibility of
negotiating a Precautionary Standby (Reftel A).

5. (SBU) Without much public fanfare, the CBRT has moved
aggressively to head off a FX liquidity shortage. On October
9, the CBRT announced it would enter the interbank FX Depot
Market as a broker (reftel C), effectively taking on all
counterparty risk and keeping the interbank FX market liquid
and functioning. On October 24, the CBRT announced it would
double the amount of FX that banks could borrow directly from
the CBRT on a short term (up to two week) basis to USD $10.8
billion, and that it would resume daily FX auction sales.
Comment: The CBRT not only deserves credit for moving
aggressively to maintain FX liquidity, but also doing it in
an intelligent manner. It has priced its FX loans above
market rates, thereby supporting the interbank market and
acting only as a lender of last resort. The doubling of
direct FX lending limits responds to fears of an FX shortage
in the next few months when approximately USD $10 billion in
FX loans come due. The CBRT move assures the market that
banks will be able to meet their FX obligations even if they
have problems rolling over their offshore FX loans. The move
also may give Turkish banks the security they need to roll
over the FX-denominated credit lines they have extended to
Turkish companies. This is an important source of FX funds
for Turkish companies. According to Barclays Capital,
Turkish banks have USD $24 billion in FX-denominated credits
outstanding to Turkish companies, 70% of which are
short-term. End comment.

6. (SBU) The CBRT is focusing its efforts on maintaining FX
liquidity, not on protecting the exchange rate. The CBRT's
Monetary Policy Committee (MPC) decided October 22 not to
raise the CBRT's policy rate (16.75%) in response to the
lira's depreciation, and lowered its lending rate by 50 basis
points (to 19.75%). The MPC statement recognized that the
lira's depreciation will cause an uptick in inflation, but
felt that the inflationary pressures would be largely offset
by the expected fall in energy and food prices. (Note: most
Turkish production contains imported inputs, and any lira
depreciation results in "imported" inflation. Economists
estimate the inflation pass through from lira depreciation is
.20-25% over the following 12 months, with about 60% of that
impact in the first four months. Thus the 37% lira
depreciation so far in October will translate into between
4.4% and 5.6% of additional inflation from November to
February. End note.)

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