(Bloomberg) -- Turkish state lenders began supporting the lira again following the currency’s biggest drop in more than a year on Wednesday.
The currency steadied on Thursday, trading 0.5% weaker at 23.37 as of 2:10 p.m. in Istanbul. The fall was far less dramatic than the previous day, when state lenders halted dollar sales and the lira weakened 7%, the most since 2021.
The depreciation followed President Recep Tayyip Erdogan’s re-election, extending his two decades in power. Last week, he chose Mehmet Simsek, a former Merrill Lynch bond strategist, as his new finance minister, signaling that Turkey was set to shift from its long-held stance of heavy state interventions to prop up the currency.
After their reversion to that policy on Thursday, the cost of insuring against a Turkish default rose, suggesting unease among fixed income traders. Five-year credit default swaps widened, for the first time this month, from 483 basis points to 516.
A 2018 protocol between the Turkish Treasury and the central bank allows the latter to direct state lenders to sell foreign exchange.
This week the Treasury briefly suspended the protocol before reversing course to let the interventions resume, according to people with knowledge of the discussions.
The central bank and the Treasury and Finance Ministry both declined to comment. Turkey’s state banks don’t comment on their foreign-exchange sales.
The central bank’s used up billions of dollars of reserves trying to bolster the currency. It’s now down 20% against the dollar this year, the most among major emerging currencies after Argentina’s peso.
“We see the lira correction as a realization by Turkish policymakers that their liberal use of reserves to defend the currency has run its course for now,” said Erik Meyersson, chief emerging-market strategist at SEB AB. He expecting the lira to reach 27 by the end of the year.
Central bank expectations
With Simsek’s return, investors are also expecting moves toward more market orthodoxy with other institutions including the central bank, which is keeping interest rates well below the level of inflation.
Central bank Governor Sahap Kavcioglu has backed Erdogan’s calls to keep monetary policy loose. Since getting the role in March 2021, the monetary authority has lowered its base rate from 19% to 8.5%. Inflation is around 40%.
Hafize Gaye Erkan, a former banker at Goldman Sachs Group Inc. and First Republic, has emerged as a front-runner to replace Kavcioglu.
The central bank’s next meeting to set interest rates is scheduled for June 22 and investors expect a hike, fueled by projections of a change at the top post.
Still, investors remain cautious that Erdogan — after so long espousing the benefits of unconventional monetary policies — will allow a radical shift.
“There is a little glimmer of hope that Erdogan seems to have taken a turn toward sane monetary and fiscal policies,” said Enrique Diaz Alvarez, chief risk officer at London-based Ebury. “But I need to see more to be convinced Erdogan is executing a U-turn.”
(Updates with markets in second paragraph.)
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