TODAY’S ZAMAN – Lira firms slightly amid hopes of easing tension

Lira firms slightly amid hopes of easing tensionThe lira pared some losses on Wednesday amid market hopes that President Recep Tayyip ErdoIan would be able to make peace with the central bank governor in a meeting scheduled later in the day.One US dollar bought 26195 Turkish liras, recovering 049 percent from Tuesdayand#39s 26475.

Turkish markets were still nervous on Wednesday, and Borsa Istanbul (BIST) traded more than 1 percent lower, still better than a 33 percent tumble on Tuesday. Scheduled to meet Central Bank of Turkey Governor Erdem BaII in Ankara late on Wednesday, ErdoIan seemed likely, at best, to agree to disagree on interest rate policy with BaII.

The benchmark 10-year government bond yield fell to 833 percent from 839 percent on Tuesday. BaII and Ali Babacan — deputy prime minister in charge of the economy and a staunch defender of the central bank — were due to meet ErdoIan later on Wednesday.

ErdoIan has said both of them need to andquotshape upandquot and has denounced defenders of high interest rates as andquottraitors,andquot suggesting the chances of forging any common understanding are slimErdoIanand#39s demands for a sharp rate cut to boost economic growth before a June election, even though inflation remains high, have helped to send the lira to record lows and raised concern about the bankand#39s independence. Unable to raise rates to defend the Turkish currency, BaII has resorted to tweaking policy on the margins to try to boost dollar liquidity, with limited success.

andquotWhen ErdoIan finally meets BaII, Babacan, et al. he needs to signal some kind of peace has been called, and let them get on with their jobs,andquot said Timothy Ash, head of emerging markets research at Standard Bank in London.

Late on Tuesday, a written statement from the Prime Ministry, following a more than eight-hour meeting, highlighted the central bankand#39s independence to allay investor concerns. The Prime Ministry has praised the central bankand#39s role over the past decade in stabilizing the Turkish currency and economy, highlighting in a statement the independence of the central bank amid investor concerns that authorities are ramping up efforts to subdue the bank.

andquotConfirming BaII in office for another term would go some way to easing market concern, albeit [Iand#39m] not sure whether BaII would want another term in this environment,andquot Ash said.Confidence in the lira was boosted on Wednesday by data showing a lower-than-expected current account deficit in January.

Turkey relies on foreign capital inflows to finance the deficit, its economic Achilles heel, leaving it particularly vulnerable when overseas investors pull back.andquotAs we speak we have been taking profit quite actively in the run-up to the elections and political temperatures have risen,andquot said Anthony Cragg, emerging markets senior portfolio manager at Wells Fargo Asset Management.

andquotThe concern out there, which is not unique to us, is of government interference, particularly in monetary policy. It looks like the president is leaning on the central bank to cut rates at a time when they should not be cutting,andquot he said.

andquotFor now thatand#39s enough to worry investors.andquotThe Prime Ministry statement on Tuesday came immediately after a key meeting on economic matters headed by Prime Minister Ahmet DavutoIlu.

The statement said ministers responsible for the economy, chairmen of financial watchdogs and relevant officials participated in the meeting.BaII and nine other ministers were present at the meeting.

The statement said the officials discussed developments in international markets and their impact on the countryand#39s economy.It noted that officials had agreed on a andquotmore positive outcomeandquot than expected for the inflation rate and current account deficit (CAD), stressing the andquotpowerful pillarsandquot of the Turkish economy and vowing to maintain strict fiscal discipline.

Worries on the streetBaII, a former professor respected for his command of economic theory, is unlikely to yield to the sort of rate cuts ErdoIan wants, particularly with inflation running well above the bankand#39s 5 percent target.But ErdoIan is wedded to the idea that high rates cause high inflation, and his assaults on the central bank go down well with industrialists who have grown rich during his time in power and have been among the guarantors of more than a decade of electoral success.

The weakness of the lira, which is down around 12 percent against the dollar this year, is, however, starting to hit ordinary Turks in the pocket, something the ruling AK Party will be keen to avoid as the parliamentary election approaches. andquotObviously weand#39re feeling it.

. the local merchants follow the lira very closely and put their prices up.

Everyone is doing it,andquot said retired businesswoman Nesrin, 55, shopping with her daughter-in-law on one of Ankaraand#39s main commercial streets.Another deputy prime minister, Numan KurtulmuI, tried to calm such worries on Wednesday, telling reporters that the Turkish economy was andquotextremely well-prepared for volatility.

andquotThe bank said on Tuesday it would adjust its reserve requirements — used to control the amount of dollars in the market — to boost foreign exchange liquidity temporarily by about $1.5 billion over the next few weeks.

The cost of insuring exposure to Turkish debt edged back from 11-month highs, with Turkeyand#39s five-year credit default swaps (CDS) dipping to 224 basis points from a close of 227, according to data from Markit.

SOURCE: Today’s Zaman