ISTANBUL: Turkey accused Western credit rating agencies on Friday of deliberately attempting to undermine the banking sector amid attacks on the lira.

The scathing comments from President Tayyip Erdogan and his son-in-law, Finance Minister Berat Albayrak, came after agencies Moody’s and Fitch this week sounded more alarm about the state of Turkey’s banks, citing impact of the currency sell-off.

The lira has lost 42 per cent of its value against the dollar this year, deepening concern about lenders’ asset quality and their ability to ride out the crisis. For years, Turkish firms have borrowed in dollars and euros, drawn by lower interest rates.

The currency slump has driven up the cost of servicing that debt and investors fear that banks could be hit by a wave of rising bad debt. Around $179 billion of Turkey’s external debt matures in the year to July 2019, according to JPMorgan estimates. Most of that - around $146bn - is owed by the private sector.

“These rating agencies - in a way that has no precedent in the world - right after every forex attack they have weighed in and made intensive efforts to create a pessimistic view of our banks,” Albayrak said in a speech in Istanbul. He said banks’ balance sheets were stronger than most of their global rivals.

Erdogan, characteristically, was more scathing.

“If they have their dollars, we have our God. They can’t topple Turkey with dollars,” he told supporters in the northwestern province of Balikesir.

“Put this aside, leave those impostors, those racketeers. They have said a lot of things about us.” Erdogan said Turkey was taking steps to help the currency, and was seeing concrete results. Earlier on Friday the government said it would lower the level of withholding tax on lira bank deposits, while raising it on foreign currency deposits.

The lira firmed some 1pc after the move. It was at 6.5900 at 1400GMT, rebounding strongly from an overnight low of 6.8994.

CHRISTIAN PASTOR: Erdogan has repeatedly called on Turks to sell their dollars and euros to buy lira. Friday’s move by the government was aimed at making it less attractive for investors to hold foreign-currency deposits, although it was unclear if it would work.

“A rise of 1-2 points on the tax on foreign deposits would not be very detrimental,” said Cem Baslevent, an economics professor at Istanbul Bilgi University. “The reason people hold foreign currency is not because of the interest rate return, but the expectation the exchange rate will rise.” Data released by the central bank on Friday showed that foreign exchange held by Turks fell to $152.8bn as of Aug 24, from $159.9bn on Aug 10 - suggesting people were heeding Erdogan’s call, or cashing in from the crisis.

Initially sparked by worries about Erdogan’s influence on the central bank, the lira crisis has worsened over a rift with Washington over an American evangelical Christian pastor detained in Turkey on terrorism charges.

Erdogan, a self-described “enemy of interest rates”, wants to see lower borrowing costs to keep credit flowing, particularly to the construction sector. Investors, who see the economy heading for a hard landing, want to see decisive interest rate hikes.

Other data showed that the central bank’s gross foreign exchange reserves fell to $72.9bn as of Aug 20, from $79.1bn on Aug 10.

EYES ON CENTRAL BANK: The central bank is due to hold its next rate-setting meeting on Sept 13. Sources told Reuters on Thursday that one of its deputy governors, Erkan Kilimci, is leaving the bank.

“Kilimci had no disagreements with the central bank administration on any issues — including interest rates. His expertise will be employed at another public position, that’s all,” one senior source told Reuters.

The central bank and the banking watchdog have taken a series of measures to try to prop up the currency since its recent slide began, although it has not raised interest rates since early June.

Published in Dawn, September 1st, 2018