Turkish Corruption Probe Causes Further Damage to Erdogan and Lira

by on December 26, 2013 6:56 pm GMT

The Turkish central bank Governor Erdem Basci asked the Prime Minister Recep Tayyip Erdogan to resign during the ongoing corruption probe that has caused the Istanbul stock market and the Turkish lira to plummet. The political tensions tightened as Erdogan’s response to the probe was to dismiss nearly all of the police heads that were issuing the probe into the cabinet’s corruption.

The lira has declined 1.4 percent over the last two days, and almost six percent this month, causing the lira to reach an all-time low against the dollar at 2.1038. The Borsa Istanbul 100 Index declined 1.5 percent, hitting a four-month low. Erdogan is trying to buy time by replacing 10 ministers. “Prime Minister Erdogan didn’t directly respond to that call for him to quit, but that may change in the following days,” said Haluk Burumcekkci, the chief economist at Burgan Securities.

Central bank Governor Basci is trying to buy time and prevent the lira’s further decline by selling at least $6 billion through to the end of January. The bank already sold $450 million for the third consecutive day and marks the largest amount sold since June 11. The corruption probe does add fuel to the fire, but equities and the lira have not been able to recover since the first initial speculation of a taper by the Federal Reserve over the summer.

The end to the lira’s down slide is not seen. Central bank actions are only looking to slow the decline. ” Gokce Celik, economist at Finansbank AS, said that Basci’s auctions “can only smooth the depreciation trend rather than reversing it.” Celik said the central bank’s reserves are not large enough when compared to Turkey’s large external financing needs.

The current account is continuing to widen and the foreign-exchange reserves are $115 billion as of December 13.