“The Lira has lost as much as a third of its value against the dollar, since the Federal Reserve in Washington began making noises last May about cutting back on its stimulus program, prompting investors to move their money from risky emerging markets…”, Wall Street Journal, February 9, 2014

“Whatever the outcome, Turkey is largely at the mercy of foreign investors and policies made in Washington. No one is more aware of that than the currency traders at the Grand Bazaar.(Currency trader Osman Atac) could recite the calendar of upcoming U.S. economic data releases and talk at length on the likely direction of Fed policy as Janet L. Yellen takes over as chairman from Ben S. Bernanke.”, WSJ

“As I have said before, its “all Fed, all the time”, on business news shows and periodicals. I, and many others, don’t think that is prudent. I think it’s pretty scary that the U.S. and even the world’s financial and economic activity seems to revolve around and depend upon on the combined knowledge and decisions of 12 largely unaccountable individuals at one central bank, the U.S. Federal Reserve. This institution’s leaders have admitted that they have had poor foresight of major economic events. The hindsight evidence shows that their economic forecasts are constantly and materially wrong. And do you really believe the Fed’s denials, when they say they didn’t have a major role in causing the U.S. housing bubble/bust and the 2008 financial crisis? I don’t. They are touting their role post-crisis in raising U.S. housing, mortgage securities, and stock prices and clearly their monetary actions are the source of asset bubbles and busts around the world (like the subject of the attached article on Turkey).”, Mike Perry, former Chairman and CEO, IndyMac Bank

INTERNATIONAL BUSINESS

Turkey Struggles to Protect Its Lira

By JACK EWING and SEBNEM ARSU
FEB. 9, 2014

 

Traders bartering in a Grand Bazaar alley in Istanbul. Since May, the lira has lost a third of its value against the dollar, and the consequences of a further decline would be serious. Guy Martin for The New York Times

ISTANBUL — It was late afternoon in Istanbul. But seven time zones away, on Wall Street, the opening bell was ringing.

Seconds later, in a dingy alley of Istanbul’s vast Grand Bazaar, several dozen men with cellphones pressed to their ears began gesturing and shouting loudly.

They were currency traders, who every day buy and sell tens of millions of dollars, euros and Turkish liras in a narrow space that is sheltered by a sagging blue-striped canopy and furnished with an old refrigerator and a few plastic stools.

The traders had been noisily plying their craft since early morning. But when they learned from the television screens inside the nearby gold shops that the Dow Jones industrial average had opened higher in New York, the trading turned even more tumultuous. The dealers locked in or unwound their bets on which direction the dollar would head in relation to the Turkish lira.

The frenzy was a demonstration of how the value of Turkey’s money — which has broad implications for the national economy — is determined largely by events beyond the country’s control. And lately the lira has been alarmingly weak.

The currency has lost as much as a third of its value against the dollar, since the Federal Reserve in Washington began making noises last May about cutting back on its stimulus program, prompting investors to move their money from risky emerging markets to the United States in anticipation of higher interest rates there. More recently, the steady exit of foreign money has been more of a stampede, with about half the lira’s decline occurring since mid-December, as political turmoil engulfed the government of Prime Minister Recep Tayyip Erdogan and violence raged in neighboring Syria and Iraq.

Investors’ jitters about Turkey might grow after weekend clashes between the riot police and demonstrators protesting a new law that would allow the government to block web pages without a court order.

The lira’s plunge has endangered the Turkish economy, which is heavily dependent on dollar- and euro-pegged transactions and loans for the country’s everyday business. The decline has raised fears of a fresh financial crisis on the edge of Europe. On Friday the ratings agency Standard & Poor’s lowered Turkey’s credit rating to “negative,” down from “stable.”

The currency trading in the Grand Bazaar represents but a sliver of Turkey’s multibillion-dollar foreign exchange market, in which most trades are conducted anonymously on electronic exchanges. Here in the bazaar, the trading is done mainly on behalf of money-changing shops.

No cash changes hands in the impromptu exchange. The sums are transferred among the traders’ clients later.

But lately this narrow alleyway has become a microcosm of Turkish macroeconomics. While traders and some financial analysts say that Turkey is not in an economic crisis — not yet, anyway — there is a rough sense of uncertainty about the financial future.

Osman Atac, a 52-year-old currency trader known as Billiard Osman for his prowess with a pool cue, conceded that this slump in the lira was different — sharper and deeper — than others he had seen in the quarter century since he switched from selling used cars to trading money in an alley.

“We earned in ’94, we earned in 2001,” said Mr. Atac, referring to past global currency upheavals, when the lira plummeted but traders profited by arbitraging the exchange rates. But the steady, inexorable decline this time has provided fewer sharp swings that would give the traders opportunities for arbitrage.

“In this turbulence,” Mr. Atac said, “no one is making any money.”

Mr. Atac, clutching the battered Nokia cellphone he uses to keep in touch with his customers, said he thought the lira would not get any weaker than the record of 2.39 to the dollar it hit on Jan. 27. That is a sentiment shared widely in Turkey.

So far, Mr. Atac has been right. The lira has recovered somewhat since the low point, strengthening Monday to about 2.21 to the dollar, a 23 percent decline since May.

But the consequences of a further decline would be serious. Turkish companies have borrowed $130 billion in foreign currencies, according to the International Monetary Fund. Such loans offered lower interest rates, but came with a higher risk that is now materializing. When the lira goes down, it becomes more expensive for a Turkish company to make its payments on a dollar loan. If the lira weakens further, hundreds of companies could go bust.

“The depreciation of the lira has already eaten into revenues and profits,” said Sinan Ulgen, chairman of the Center for Economic and Foreign Policy Studies, known by its Turkish initials EDAM, a research organization in Istanbul. “The next steps will be to force them toward a process of bankruptcy.”

A steep rise in official interest rates, imposed by the Turkish central bank the week before last in an effort to halt the lira’s decline, is likely to choke the easy credit that has fueled a boom in consumer spending.

“At the present time what we are looking at is not a meltdown but a sharp slowdown in growth,” said Adam Slater, a senior economist at Oxford Economics in Oxford, England. But he added, “It’s a moving target.”

Turkey might seem to offer disturbing parallels to countries like Ireland or Spain at the beginning of the euro zone crisis four years ago. As in those countries, Turkish developers funneled foreign capital into construction projects, covering the dry hills surrounding Istanbul with endless tracts of high-rise apartments, office buildings and shopping centers connected by crowded freeways.

But many Turks insist there is no property bubble like the one that devastated Ireland and Spain.

Baris Dumankaya, vice chairman of a construction company that bears his family name, pointed out that half of Turkey’s 81 million people are younger than 30, which he says should ensure steady demand for housing. Banks require high down payments, which means that prices would have a long way to fall before homeowners owed more than their properties were worth, Mr. Dumankaya said. Inflation, at more than 7 percent and rising, also makes declines in real estate prices less likely.

Nor does Turkey have the government debt and deficit problems that crippled the Greek economy and continue to threaten Italy’s.

Mr. Dumankaya, whose family has been in the construction business for half a century, agreed that the flood of easy money attracted people into the industry who had little experience and might be overextended. Sales of apartments in newly constructed buildings have slowed slightly, he said, and banks have become choosier about lending.

The plunge of the lira has already exposed the Turkish economy’s dependence on short-term foreign investment. Most foreign capital is invested in Turkish stocks and bonds rather than longer-term projects.

All it takes is a phone call or a few clicks of a mouse for short-term investors to move their money elsewhere, and that is what foreign investors have been doing, not only in pulling money out of Turkey but from countries like Russia, Argentina and South Africa, whose currencies have also fallen as a result.

Mehmet Kutman, chief executive of Global Investment Holdings, a private equity firm in Istanbul that invests in assets like port facilities for cruise and cargo ships, said he thought the lira could still fall 5 to 10 percent further.

“The good thing is that it will stop excess leverage,” Mr. Kutman said, referring to the country’s high level of private debt.

Whatever the outcome, Turkey is largely at the mercy of foreign investors and policies made in Washington. No one is more aware of that than the currency traders at the Grand Bazaar.

Mr. Atac, the trader, looked like an ordinary shopkeeper in his wool cap, long wool coat and fleece-lined snow boots to protect against the cold paving stones. But though his education stopped at high school, he is well versed in his chosen field. He could recite the calendar of upcoming U.S. economic data releases and talk at length on the likely direction of Fed policy as Janet L. Yellen takes over as chairman from Ben S. Bernanke.

“Yellen was Bernanke’s strongest supporter and is going to stick with his plan,” Mr. Atac said.

Yet, in an ominous sign, some of the traders in the bazaar had already burned up their capital and gone bankrupt as the lira plunged, Mr. Atac said.

Whether that proves to be a metaphor for the Turkish economy will be revealed in coming months.

A version of this article appears in print on February 11, 2014, on page B1 of the New York edition with the headline: Lira’s Value in Turkey Is Buffeted Externally. 

Posted on February 13, 2014, in Postings. Bookmark the permalink. Leave a comment.

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