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tomandlu

Turkish Lira And Interest Rates

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Can anyone explain, for a bear of small brain, why Turkey raised IRs and why it hasn't worked. I understand that it was something to do with currency speculators, but I'd be interested in a simple version of what the mechanic is. Why were the vultures circling, and why would raising IRs fend them off?

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My understanding is that US QE stopping meant that people can see that the global cheap money tap is being turned off which means that investors are now looking for safer rather than speculative returns and are pulling their money out of fringe markets.

This is making the Turkish Lira fall at a rate of knots so the interest rate has gone up to strengthen it and provide a better return for bond investors.

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Can anyone explain, for a bear of small brain, why Turkey raised IRs and why it hasn't worked. I understand that it was something to do with currency speculators, but I'd be interested in a simple version of what the mechanic is. Why were the vultures circling, and why would raising IRs fend them off?

Emerging Mkts have been turmoil for a few years. turkey is in economic and political stook. Thus global investors took their money out. the currency collapsed. A good solution often is hiking rates though they'll have to stick at it even though it will be short term painful.

Nobody knows if it will work or not. Far too early to tell, whatever the MSM says.

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I heard it was carry trade..strengthening dollar would wipe out gains..so out comes the cash.

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There are two ways the Turkish govt can defend the value of its currency: lift domestic interest rates to discourage sellers and encourage inward investment, and/or sell dollars (the global reserve currency in which everything is ultimately priced) and buy lira. The problem with the first is that it causes a tightening of credit conditions that may weaken the economy and ultimately drive it into recession. The problem with the second is that eventually you run out of dollars.

Currency speculators clearly believe the Turkish economy is too weak to withstand much of the former and that the govt's dollar reserves are nearly exhausted which is why they continue to short the lira in the expectation of a further devaluation.

I believe that China is a more credible smoking gun for the change in investor sentiment we're seeing worldwide rather than the taper, but the two will be mutually reinforcing.

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It's been widely reported that Turkey suffers from a lot of corruption. If the markets believe you are corrupt increasing interest rates isn't going to attract any more capital.

As has already been mentioned the fact the US is slowing down the dollar printing machine appears to be affecting the emerging markets more than the established nations.

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Some EM's have partied on borrowed $$$ i.e. speculative capital flows running up current a/c deficits.

Those flows are reversing, which means their currencies are being dumped, which means their $$$ debts are more expensive to service in domestic currency, which means they find it more difficult funding their c/a deficits, which means they want to try and stop the outflows, which means they have to make their currency more attractive which means they raise interest rates, which means they'll raise the cost of domestic credit which means they'll choke off their economy which means they'll see lower growth, which means the foreign capital will b*gger off anyway.

In a nutshell they've screwed themselves.

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Was listening to the radio a few weeks back.

Lux Apartments in Istanbul ..... 8 million dollars

Same line as any agent in London was rolled out.

POP

Went on to airbnb to check out reasonable accomm for a family holiday.

Average pay in TUR is $10k pa (£6k / £500/m). Though that seemed very high to me ref Wikipedia.

Costs were some £350-£500 PER WEEK. HAHAHAHAHAHA :lol:

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Emergency interest rate rises - as Norman Lamont and John Major would surely tell you - don't work

By making an emergency rate rise, the country in question is simply confirming the conjecture, that it is up fubared

There is a potentially interesting and marginally similar situation perhaps on the horizon, Switzerland. The Swiss National Bank has said - in the very clearest of terms - that it will do whatever is necessary to keep the EURCHF exchange rate above 1.20

Right now, it is 1.219 and I really won't be surprised if the 1.20 target (for that is what the SNB has made it) gets a stroke sometime in the not too distant future.

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Emergency interest rate rises - as Norman Lamont and John Major would surely tell you - don't work

By making an emergency rate rise, the country in question is simply confirming the conjecture, that it is up fubared

There is a potentially interesting and marginally similar situation perhaps on the horizon, Switzerland. The Swiss National Bank has said - in the very clearest of terms - that it will do whatever is necessary to keep the EURCHF exchange rate above 1.20

Right now, it is 1.219 and I really won't be surprised if the 1.20 target (for that is what the SNB has made it) gets a stroke sometime in the not too distant future.

how is that similar, the EURCHF rate has been about 1.20 for about 3 years, it is a defacto Euro and a piece of pish to keep it as a defacto Euro. Its the opposite in fact to Lamont and EMs, Lamont could have kept the Dmark in the ERM till the cows came home or the UK became more productive Switzerland just has to keep printing a ridiculous amount of CHF and buying Euros or introduce negative rates again (as it did 30 years ago). Its a complete diametric to a politically perceived undervaluation, its a politically perceived overvaluation. Too all intents and purposes the CHF is no different to the Euro until such time as the sovereign debt of CH becomes a bigger worry than the soverign debt of the Eurozone

Edited by Maria Gorska

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how is that similar, the EURCHF rate has been about 1.20 for about 3 years, it is a defacto Euro and a piece of pish to keep it as a defacto Euro. Its the opposite in fact to Lamont and EMs, Lamont could have kept the Dmark in the ERM till the cows came home or the UK became more productive Switzerland just has to keep printing a ridiculous amount of CHF and buying Euros or introduce negative rates again (as it did 30 years ago). Its a complete diametric to a politically perceived undervaluation, its a politically perceived overvaluation. Too all intents and purposes the CHF is no different to the Euro until such time as the sovereign debt of CH becomes a bigger worry than the soverign debt of the Eurozone

I did say marginally similar. By which I mean that the power of the market is quite likely to over ride (eventually) politically motivated targets. The SNB statement 'setting' the 1.20 floor was issued on 6 Sep 2011. It uses all the words that markets 'take issue' with

You can read the statement in the link below

Beyond that the similarities do disappear quickly - Turkey is a basket case, Switzerland isn't. Its interest rate hike merely confirmed what the market knew already.

But it would never be wise for any individual state to provoke too serious a fight with the broader market, not even Switzerland

http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf

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