The great lesson of the financial chaos enveloping Turkey is that you just don’t mess with markets. For they’re not some option, some taste or fashion, they’re the reality of what everyone’s thinking. Tell people they’re not allowed to think that way and they’ll carry on or worse, redouble their efforts to do so. This being the problem that all economic planners suffer from. They think all should be thinking as they do and get most upset when they don’t. Their attempts to correct this just redoubling the original thoughts.
As is happening here in Turkey. Erdogan thinks people should value the Turkish lira more highly than they do. He’s prepared to do something about it too. But one good reason people value the Turkish lira lower than Erdogan thinks they should is because Erdogan will take action to try to make his view of the value stick. Which it won’t, of course. No one ever does fight the foreign exchange markets and win.
The lira overnight swap rate has now jumped again, to 1,200%, says Reuters, double the (already alarming) level seen early this morning.
That’s not right, just not right at all. You need government intervention to screw a market as badly as that:
Turkish Offshore Overnight Rate watch: screen 600%, heard 750% traded.
— Paul McNamara (@M_PaulMcNamara) 27 March 2019
Ouch, so what’s really happening?
In the past eight months, President Recep Tayyip Erdogan’s government has imposed price controls, forced lenders to keep credit flowing and banned the use of dollars in most contracts. Most recently, he trained his invective on a familiar target: foreign bankers, with the promise of an investigation into New York-based JPMorgan Chase & Co. for predicting a decline in the lira. “These are all measures that conflict with the very notion of a market economy,” said Cristian Maggio, the head of emerging-market research at TD Securities in London. “The government is intervening too much.”
The thing is, just because you don’t like market prices that doesn’t mean that market prices are going to ignore you. Quite the contrary, they will assert themselves soon enough. With a vengeance, the more you’ve screwed around to try to stop them.
Turkey may punish Citi, Deutsche Bank as well as JPMorgan over lira
Turkish regulators may also punish foreign banks such as Citigroup and Deutsche Bank for seeking to manipulate the value of the lira, Hürriyet newspaper reported citing an unidentified banker. Turkey’s banking watchdog and market regulator said on Saturday that they were investigating JPMorgan Chase & Co. on the same charges. “They may end up being temporarily or permanently barred from the payments system,” the banker said, according to Hürriyet. “Citibank, JPMorgan and Deutsche Bank are among the international banks being mentioned in this regard.” The Turkish lira slumped more than 4 percent against the dollar on Friday
That’s from last week. So, think of banning the major traders of something and of course the price will fall. That’s just what happens. Because that’s what a market is. People buying and selling stuff. And a market price is just the price at which people do so. What horrifies people is that this casualness leads to the real price of something – the real price is the price at which people will buy and sell, that market price.
Investors dumped Turkish bonds and stocks on Wednesday after the nation orchestrated a currency crunch to prevent the lira from sliding days before an election that will test support for President Recep Tayyip Erdogan’s rule. The cost of borrowing liras overnight on the offshore swap market soared past 1,000 percent at one point on Wednesday because local banks are under pressure not to provide liquidity to foreign fund managers who want to bet against the lira. This has forced investors who want out of their lira positions to instead sell other Turkish assets to access the funds they need close those trades. The yield two-year Turkish bonds jumped above 20 percent on Wednesday and stocks slid the most since August.
See, told’ya. Messing with markets just doesn’t work. Yet politicians just never will learn, will they?