Weakness of the lira: Turkey limits corporate lending

As at: June 27, 2012 6:23 pm

President Erdogan’s government wants to force companies to sell foreign exchange reserves to support local currency, the lira. Experts warn of economic damage.

Oliver Mayer-Rüth, ARD Studio Istanbul

Suddenly, the lira increased: from last Friday to Monday by about five percent. If you received 18.26 lira for 1 euro on Thursday, today it was temporarily 1 lira less. The Turkish Ministry of Finance has once again opened a bag of tricks to stabilize the domestic currency. However, despite its short-term increase, the newest measure mostly gets the experts’ heads spinning.

Financial institutions may only grant loans in lire to companies with a foreign currency or less than approximately $ 900,000 in their accounts. The Turkish banking regulator decided so. This should force some to sell their foreign exchange reserves and thus strengthen the Turkish currency.

Timothy Ash, an analyst at asset management firm Bluebay, tweets that these are capital controls – a term that scares investors and traders alike. The news agency cites that this does not fundamentally change the high demand for dollars, euros and the like Reuters Ash who is considered among others as an expert on emerging markets. Turkey’s currency hunger is fueled by “high inflation, low interest rates and a fundamental loss of confidence in the currency.”

Sharp criticism of the German-Turkish Chamber of Commerce

Murat Ucer and Atilla Yesilada, economic analysts at Global Source Partners, have criticized the measures as draconian, distorting and chaotic. This will help the currency in the short term as some companies may have to sell foreign currency in order to borrow further. However, they could either invest their foreign currency in Eurobonds or transfer it abroad, which would accelerate the outflow of foreign currency. They can also sell their reserves in dollars or euros to banks with the option to buy them back within a few months.

This move was strongly criticized by the German-Turkish Chamber of Commerce and Industry, which usually tries to use diplomatic tones. According to Thilo Pahl, managing director of AHK Turkey, the Turkish government is interfering with the measure in the financial market and with operational investment decisions. “In the medium term, this intervention will lead to further uncertainty among investors. There will be less investment and the Turkish lira will remain under pressure, ”says an economic expert.

Ankara regularly conjures up surprising measures to avoid an interest rate hike that has been heavily criticized by Turkish President Erdogan. In January, companies were forced to replace 25 percent. export earnings in dollars or euros to lira. Now 40 percent.

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Banking experts generally view capital controls as a significant restriction on the freedom of establishment. This criticism may have negative effects on foreign direct investment and economic growth.

Some people are reminded of December 2021, when the Turkish currency was around 18 lira per euro and made an even more amazing leap upwards thanks to fiscal policy measures. Ankara then promised its citizens that the state would compensate for the possible loss in the event of a further decline in the national currency, if it exchanged dollars or euros for lira and made long-term investments. At times, it greatly increased confidence. Today, however, the rate of the Turkish currency is as low as it was then. How many investors then took advantage of the government’s offer, it was not a question of retrospect.

There are many indications that Erdogan has no intention of giving up his rejection of interest rate increases. So that the lyre does not end up, she repeatedly buys herself by reaching for her bag of tricks. The goal is to break through to the next elections, which must be held by the end of June 2023 at the latest.

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