Mr. Clean- Part II...
"Here...give me 5-10% of your portfolio...I'll invest it in emerging markets"...
Mr. Clean went to Turkey last October, and when he got back this week...interest rates dun shot up to 6200%...
Turkey Gives Up Lira Defense, Lets Currency Float (Update2)
By Yalman Onaran
Ankara, Turkey, Feb. 22 (Bloomberg) -- Turkey abandoned a defense of the lira that cost the central bank more than $3 billion in one day and drove up overnight interest rates to 6,200 percent.
The government, after a 12-hour meeting, said letting the currency float will help boost exports and tourism revenue. It also will lower the cost of financing lira-denominated debt, including $4 billion that comes due next month.
The lira, which closed Wednesday at 686,750 a dollar, may lose as much as 20 to 25 percent of its value once trading resumes Thursday, said Treasury Undersecretary Selcuk Demiralp. That would fuel inflation and put pressure on the ability of Turkish banks to repay $15 billion of foreign currency obligations.
The government will have to ``explain to the public that the banking systems will be sound, and there's no threat of a big devaluation,'' Matt Vogel, an economist at Merrill Lynch & Co. in London, said before the announcement. ``If they convince the man on the street, then there won't be a run on the lira.''
Turkey had spent $7.6 billion this week to prop up the currency, in part to bring down inflation and also to live up to an agreement with the International Monetary Fund that late last year cleared the way for the government to borrow $7.5 billion in emergency loans in addition to about $3.5 billion promised under another program.
IMF Returns
An IMF delegation is expected to return to Turkey on Thursday, Demiralp told reporters after the government meeting.
The fund will discuss revising its program targets in light of the government's decision, he said. The goal would be to keep inflation at current levels and bring it down to single digits next year, he said. Turkey had been targeting to bring the annual inflation rate down to 10 percent by the end of the year from 28 percent in January.
In a statement, the government said it will keep pursuing state asset sales and other reforms promised to the IMF.
Along with the billions of dollars it spent to buy lira, the central bank allowed overnight interest rates to rise to as high as 6,200 percent from about 40 percent last week. The moves weren't enough to stem a flood of money out of the country, and the government was forced to let the currency float, giving up previous efforts to keep the lira from falling more than 0.9 percent a month against a basket of the dollar and euro.
Turkish stocks and bonds tumbled Wednesday on expectations the government's efforts were unsustainable, triggering declines in markets from Russia to Argentina.
Stocks Fall
Turkey's benchmark National 100 stock index posted its biggest one-day decline Wednesday, falling 18 percent to 7180, the lowest since Nov. 8, 1999. The index has fallen 29 percent over the past three days.
Turkey's bond due 2010 dropped 15 percent in three days, driving its yield up more than 300 basis points to a record 16.67 percent. The declines began after a row between the prime minister and president raised concern Turkey would fail to stick to its commitments to the IMF.
``This can't go on for more than a few more days,'' said Ashok Shah, manager of more than $180 million in emerging market stocks at Old Mutual Asset Managers. ``But it will happen a few more times in the next few months until politicians learn that they can't create political crises like this.''
Russia's benchmark RTS index fell 8.6 percent, its biggest drop in seven weeks. Some investors said they sold Russian stocks to cover losses in Turkey and reduce their exposure to emerging markets.
The perception of risk in emerging market debt has also increased because of Turkey's crisis. The difference in yields on emerging market bonds compared to U.S. Treasuries with comparable maturities widened 20 basis points to 728, according to a J.P. Morgan Chase & Co. index.
Rating
Standard & Poor's said it may cut the ``B+'' rating on Turkey's debt due to concerns about political stability following the political fight. S&P cut the rating on state-owned T.C. Ziraat Bankaski AS and said it may lower the ratings on other Turkish banks.
The central bank on Monday agreed to sell more than $4.5 billion of foreign currency, one-sixth of its reserves. Most of those dollars and euros flowed back to the central bank Tuesday after it stopped selling repurchase agreements.
On Wednesday, banks held onto their dollars due to concerns about the government's ability to move ahead with its economic program. The central bank spent another $3.1 billion to prop up the currency, according to a Koc Bank AS survey of banks that trade currencies with the central bank.
Concern about the weakness of some Turkish banks and the government's failure to take steps to strengthen the system contributed to the country's last economic crisis three months ago.
In November, investors pulled more than $7 billion from the country before the IMF stepped in to offer Turkey additional loans. |
