Too little, too late?
Desperation is rising in Turkey’s banking sector following months of escalating political and financial instability. Benchmark interest rates have been hiked 10 percentage points so far this year to over 17%, making it much more expensive for companies and families to service their debt. But even that hasn’t stopped the Turkish Lira from plunging almost 25% since March.
“Turkey is going through its first currency crisis of the floating era,” explainedDani Rodik, a Turkish economist and professor at Harvard University. “All the previous ones were when the rate was fixed or managed, and hence unfolded much more quickly. This one is stretched over time, and the government prefers to ignore it.”
The latest spark of concern was the U.S. government’s decision at the weekend to declare sanctions against two Turkish cabinet ministers over the detention of an American pastor. The Trump administration said it was also reviewing Turkey’s duty-free access to the U.S. market, which could affect $1.7 billion of Turkish exports. Bloomberg reported that the US has prepared a broader list of Turkish entities and individuals that could be subject to further sanctions.
On Monday the Lira shed 5.5% of its value to a record low of 5.46 against the dollar, before recovering slightly following intervention from the Bank of Turkey. The central bank changed its rules to loosen the upper limit of banks’ reserve requirements in a desperate bid to support the crumbling currency. The bank announced it was reducing the maximum amount of foreign currency lenders can park at the regulator as part of their required reserves.
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