(Bloomberg) -- Gyrations in Turkey’s stocks and the lira signal volatility is here to stay, even after the government laid out emergency measures to bolster the currency.
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The Borsa Istanbul 100 Index’s 7.9% decline on Tuesday triggered yet another circuit breaker, as it headed for the biggest three-day loss in more than two decades. The currency whipsawed between gains and losses, after soaring as much as 20% against the U.S. dollar, sending both three-month and one-year volatility to all-time peaks.
While five-year credit default swaps, a gauge of Turkey’s sovereign risk premium, fell on the day, they continued to hover near the highest in more than a year.
The moves come after President Recep Tayyip Erdogan unveiled measures including a program to protect savings from fluctuations in the lira, which had lost about half of its value against the dollar since September. While the steps have temporarily shored up the currency, the equity market’s declines signal investors remain worried.
How Erdogan’s Plan to Halt the Lira’s Fall Is Meant to Work
“In the short term, the government may have its way and enjoy the current currency rally,” said Cristian Maggio, head of portfolio strategy at TD Securities. “It will be hard for the government to keep up its credibility in this because either the commitment will be too large to be sustainable, or too small to be effective.”
According to the plan, Turkey’s Treasury will make up for losses incurred by holders of lira deposits should the currency’s declines exceed bank interest rates. For example, if banks pay 15% for one-year lira deposits but the currency depreciates 20% against the dollar in the same period, the Treasury -- that is, taxpayers -- would pay deposit-holders the differential.
The measures are intended to mitigate retail investors’ demand for dollars and bring an end to three months of turmoil for the nation’s currency. But just how local investors react -- and whether the new policies are sustainable -- remains to be seen.
“It may signal that the worst is over for the lira for now, if the program can restore some of the confidence of retail lira depositors,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. “However, at the end of the day, until interest rates provide a credible anchor against inflation, the lira will tend to be volatile and subject to downward pressure.”
The lira climbed 5.6% to 12.5993 per U.S. dollar as of 9:54 a.m. in New York. The country’s benchmark equity index, on track for a 17% three-day slump, triggered a market-wide circuit breaker for a third-straight session.
Companies with foreign-currency income, including the steelmaker Eregli Demir ve Celik Fabrikalari TAS and the glassmaker Sise ve Cam Fabrikalari AS, led the declines.
Turkey’s currency has been battered for years as Erdogan has assumed a tighter hold over the economy and turnover at the top of the central bank has intensified. The Turkish leader is heading toward general elections in 2023, the first since he lost major cities including Istanbul and Ankara to the opposition for the first time in 25 years.
Current central bank Governor Sahap Kavcioglu took office in March following Erdogan’s dismissal of Naci Agbal after just four months in the job. Agbal was a proponent of rate increases to tackle inflation, while Erdogan, bucking economic convention, argued that lower borrowing rates help tame consumer-price gains. Kavcioglu is Turkey’s fourth central bank chief in less than three years.
The central bank has slashed the one-week repo rate by five percentage points since September, in line with Erdogan’s demands. The monetary authority has also intervened in the foreign-exchange market four times this month to stop the currency depreciation.
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