Erdogan faces financial crisis four weeks before Turkey goes to the polls

ATES TUMER

Turkish Prime Minister Recep Tayyip Erdogan introduces the new Turkish liras during a press conference in Ankara, Turkey, 03 October 2008.

Erdogan faces financial crisis four weeks before Turkey goes to the polls


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Four weeks before Turkey goes to the polls on June 24, the Turkish Lira suffered its biggest loss in a decade on Wednesday.

Losing more than 5% against all major currencies, the Lira had its worst day in the worst month of the decade. The Turkish currency has lost more than 17% of its value against both the US dollar and the Euro.

The yield of Turkey’s dollar-denominated 10-year sovereign bonds surged to 7,34%.

The Lira keeps sliding every trading day, throughout May. The Lira’s continued precipitation follows an interview by President Recep Tayyip Erdogan with Bloomberg on May 14, when he announced he would be taking more direct control over monetary policy. “The Central Bank can’t take this independence and set aside signals given by the president,” Erdogan said.

This statement spooked markets. Erdogan is ideologically opposed interest rates hikes that he believes boost rather than tame inflation.

Still, the Central Bank on Wednesday did rise its primary lending rate for short-term liquidity from 13,5% to 16,5%. The question is now whether the Central Bank board meeting planned for June 7 – three weeks before Turkey goes to the polls – will dare rise interest rates substantially to tame the galloping inflation. A related question is whether Turkish foreign currency reserves can take the pressure or capital controls will have to be introduced.

The private sector is dealing with immense pressure as it is heavily indebted in US dollars; not only the US Federal Reserve is raising interest rates, but a rapidly depreciating Turkish currency is bloating the debt burden for Turkish companies.

Meanwhile, Turkey is dealing with a bulging current account deficit.

The government spokesman Bekir Bozdag hinted on Wednesday that an international plot is unfolding to undermine the President.

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