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TheCountOfNowhere

The Gobble Gobble Turkey Thread

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http://online.wsj.com/news/articles/SB10001424052702304691904579346701373199272?mod=WSJEurope_hpp_LEFTTopStories&mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304691904579346701373199272.html%3Fmod%3DWSJEurope_hpp_LEFTTopStories

Turkey's central bank—beset by political instability, tumbling confidence and one of the world's fastest falling currencies—said that it will convene an emergency meeting Tuesday, a move that could test whether once-golden emerging markets can avert a destabilizing crisis.

Central bankers in many emerging-market countries are under intense political pressure to keep interest rates low to keep economic growth on track, despite the...

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http://www.economist.com/news/finance-and-economics/21593496-political-turmoil-exposes-economic-malaise-mask

A SENSE that things are sliding out of control has gripped Turkey since prosecutors launched a series of investigations into bribery and corruption close to the government in mid-December. Even if official charges and convictions never materialise, enough has come out to unsettle foreign and local investors. It casts serious doubt on the independence of the country’s police and the judiciary, and their ability to enforce the law.

Turkey suddenly looks more like the country it was trying to leave back in the shadows a dozen years ago. Inflation is running at over 7%, the currency is sliding and the current-account deficit is around 7% of GDP. Private savings, foreign investment and exports are shrinking.

What is to be done? Ask any orthodox economist and he will probably say, “first raise the headline interest rate,” which Turkey’s central bank has held obstinately below 8% since last March (see chart). The central bank’s lending rate should be a good 11%, calculates Murat Ucer at Istanbul Analytics, a consultancy.

Extraordinarily, however, this vital tool of monetary policy is not one that the central bank is prepared to use at the moment. It prefers an alternative technique, known as the reserve-option mechanism. This allows Turkish banks to keep part of their reserve requirements in foreign currency rather than in Turkish lira. When foreign money was flooding into the country this was a good way of relieving upward pressure on the lira. But with the currency weakening it makes little sense—except as a way of unsettling investors.

More at the economist.

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