Turkish Lira Crashes to Record Low As Cash Crunch Obliterates Currency

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The Turkish lira crashed to an all-time low against the US dollar on Thursday as several foreign financial institutions failed to meet their lira obligations. As the nation faces a currency crisis, as well as an economic collapse in the fallout from the coronavirus pandemic, Turkey is in a fragile position.

On Thursday, foreign lenders failed to meet their lira obligations, with offshore investors facing borrowing costs of as much as 1,050%. A similar situation happened earlier this year when the Turkish authorities banned local lenders from trading with some of the world’s biggest banks, including UBS Group AG and Citigroup.

Although banking regulators refused to comment on the developments, it is being reported that policymakers are unlikely to slap fines on foreign banks that failed to reach their settlements.

Contributing to the lira’s collapse are skyrocketing inflation, a ballooning current account deficit, and the central bank flooding the economy with cheap credit. On Tuesday, officials reported that inflation rose 0.58% in July to an annualized rate of 11.76%. The producer price index (PPI) advanced at an annualized rate of 8.33%. The manufacturing purchasing managers’ index (PMI) clocked in at 56.9 last month.

Despite recent economic data suggesting Turkey is rebounding in the post-coronavirus marketplace, there are still various effects from the influx of foreign currency through exports. Moreover, President Recep Tayyip Erdogan pushing for lower interest rates and the central bank keeping reserves at a minimum are leading to an exodus of foreign capital.

In the meantime, the Monetary Policy Committee (MPC) confirmed that it is monitoring the developments closely:

The Central Bank will use all available instruments to reduce the excessive volatility in the markets in line with the price stability and financial stability objectives.

But this is not the first time Ankara has faced something like this. In addition to the currency crisis earlier this year, the country faced a collapse in the lira in August 2018 over geopolitical tensions with the US.

The leading stock index – the Borsa Istanbul 100 Index – plummeted 3.5%. The benchmark 20-year bond yield climbed to a four-month high of around 12%.

The USD/TRY currency pair surged 2.86% to 7.2478, from an opening of 7.0474, at 16:38 GMT on Thursday. The EUR/TRY soared 3.01% to 8.6141, from an opening of 8.3610.

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