VZCZCXYZ0006
RR RUEHWEB

DE RUEHAK #1864/01 3010526
ZNR UUUUU ZZH
R 270526Z OCT 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 7800
INFO RUEHIT/AMCONSUL ISTANBUL 4889
RUEATRS/TREASURY DEPT WASHDC

UNCLAS ANKARA 001864 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON TU
SUBJECT: TURKEY: LIRA DEPRECIATES SHARPLY 
 
REF: A. ANKARA 1855 
     ¶B. ANKARA 1820 
     ¶C. ANKARA 1763 
     ¶D. ANKARA 1744 
 
¶1.  Sensitive but unclassified.  Not for internet 
distribution. 
 
¶2. (SBU) Summary: The Turkish lira has taken a pounding, 
falling 37% against the dollar this month and 14.5% from 
October 20 to 24.  The lira's sharp fall is mainly the result 
of foreign investors selling Turkish assets (USD $14 billion 
capital outflow since October 1) and of Turkish companies and 
banks buying foreign exchange to make foreign currency debt 
payments.  Thus far, the depreciation has been orderly and 
banks are not reporting a movement by Turks out of the lira 
and into foreign currency. The GOT continues to publicly say 
that the crisis will not directly affect Turkey or Turkish 
banks, while at the same time proposing various measures in 
response, the most substantive being incentives for Turks to 
repatriate offshore funds. Meanwhile, the Central Bank (CBRT) 
has quietly instituted several measures aimed at heading off 
a FX liquidity shortage.  On October 9, it assumed 
counterparty risk in the interbank FX market (reftel C).  On 
October 24, it doubled the amount of FX that local banks 
could borrow from the Central Bank on a short-term basis and 
reinstituted daily FX auctions.  The CBRT's focus is on 
maintaining FX liquidity, not supporting the exchange rate. 
The Bank's Monetary Policy Committee (MPC) declined to 
support the lira with an interest rate increase on October 
¶22.  The MPC statement indicated that the Bank recognizes the 
inflationary impact of the lira's depreciation, but felt it 
would be largely offset by falling energy and food prices. 
End summary. 
 
¶3. (SBU) The Turkish lira has depreciated sharply as foreign 
investors, banks and local companies adjust their 
expectations in response to the global financial crisis.  The 
lira fell 14.5% against the dollar in the first four days of 
this week, October 20 through 24.  Through October 24, the 
lira has lost 37% this month.  The depreciation was driven by 
investors selling off Turkish assets, particularly hedge 
funds that had taken large lira positions as part of carry 
trades (the Central Bank's Markets Department estimates the 
capital outflow from Turkey at USD $14 billion since October 
1), and by Turkish banks and companies buying FX in 
anticipation of large FX-denominated debt payments coming due 
in the next two months. 
 
¶4. (SBU) The GOT continues to take the public position that 
Turkey does not need to take any extraordinary measures in 
response to the crisis, while at the same time proposing 
various measures to respond to the effects of the crisis 
(see reftels B, C and D), the most substantive of which is a 
proposed new law giving incentives for Turks to repatriate 
funds held offshore.  On October 24, Treasury Minister Simsek 
rejected business sector calls for the GOT to negotiate a new 
IMF Standby Agreement, saying the GOT "does not currently 
feel the need for a new accord that would involve the use of 
new funds from the IMF," but left open the possibility of 
negotiating a Precautionary Standby (Reftel A). 
 
¶5. (SBU) Without much public fanfare, the CBRT has moved 
aggressively to head off a FX liquidity shortage.  On October 
9, the CBRT announced it would enter the interbank FX Depot 
Market as a broker (reftel C), effectively taking on all 
counterparty risk and keeping the interbank FX market liquid 
and functioning.  On October 24, the CBRT announced it would 
double the amount of FX that banks could borrow directly from 
the CBRT on a short term (up to two week) basis to USD $10.8 
billion, and that it would resume daily FX auction sales. 
Comment: The CBRT not only deserves credit for moving 
aggressively to maintain FX liquidity, but also doing it in 
an intelligent manner.  It has priced its FX loans above 
market rates, thereby supporting the interbank market and 
acting only as a lender of last resort. The doubling of 
direct FX lending limits responds to fears of an FX shortage 
in the next few months when approximately USD $10 billion in 
FX loans come due.  The CBRT move assures the market that 
banks will be able to meet their FX obligations even if they 
have problems rolling over their offshore FX loans. The move 
also may give Turkish banks the security they need to roll 
over the FX-denominated credit lines they have extended to 
Turkish companies.  This is an important source of FX funds 
for Turkish companies.  According to Barclays Capital, 
Turkish banks have USD $24 billion in FX-denominated credits 
outstanding to Turkish companies, 70% of which are 
short-term.  End comment. 
 
¶6. (SBU) The CBRT is focusing its efforts on maintaining FX 
liquidity, not on protecting the exchange rate.  The CBRT's 
Monetary Policy Committee (MPC) decided October 22 not to 
raise the CBRT's policy rate (16.75%) in response to the 
lira's depreciation, and lowered its lending rate by 50 basis 
points (to 19.75%).  The MPC statement recognized that the 
lira's depreciation will cause an uptick in inflation, but 
felt that the inflationary pressures would be largely offset 
by the expected fall in energy and food prices.  (Note: most 
Turkish production contains imported inputs, and any lira 
depreciation results in "imported" inflation. Economists 
estimate the inflation pass through from lira depreciation is 
.20-25% over the following 12 months, with about 60% of that 
impact in the first four months.  Thus the 37% lira 
depreciation so far in October will translate into between 
4.4% and 5.6% of additional inflation from November to 
February.  End note.) 
 
 
Visit Ankara's Classified Web Site at 
http://www.intelink.sgov.gov/wiki/Portal:Turk ey 
 
WILSON