Bloomberg News

Societe Generale Sees ‘Aggressive’ Rate Increases in Turkey

October 20, 2011

(Updates with rates announcement in second paragraph.)

Oct. 20 (Bloomberg) -- Turkey may be forced to raise interest rates “aggressively” like Hungary did in 2008 because the central bank can’t sustain its sale of dollar reserves to prop up the lira, according to Societe Generale SA.

Governor Erdem Basci is battling to end a slump in the lira that followed the central bank’s decision to cut the benchmark rate by half a point on Aug. 4, with the lira slumping 8.9 percent against the dollar since then. The bank has used up about 10 percent of its foreign-currency reserves since July selling dollars to stem the lira’s decline. Today, the central bank left its benchmark rate unchanged at 5.75 percent, according to an e-mailed statement.

“Can the central bank sustain its intervention policy for a long time? The answer is no,” Benoit Anne, head of emerging- market strategy at Societe Generale SA in London, wrote in an e- mailed response to questions.

The lira strengthened 0.6 percent to 1.8574 per dollar at 4:35 p.m. in Istanbul, making it the best performer among more than 20 emerging-market currencies tracked by Bloomberg, paring its loss this year to 17 percent. It remains the second-worst performer among emerging-market currencies after the South African rand so far in 2011.

Swaps Eye Record

Turkey’s two-year cross-currency swaps exchanging lira debt for dollar debt climbed for a sixth day and headed for the biggest one-day increase on record after the central bank announcement. Yields on the two-year debt increased 41 basis points, or 0.41 percentage point, to the highest level in almost four months, a Turk Ekonomi Bankasi index of the securities showed.

The central bank dropped its wording on easing instruments and said it was ready to take “necessary action.”

The bank is “laying the groundwork for possible need to hike rates at some point in future,” Nick Chamie, the global head of emerging-market research at Royal Bank of Canada’s RBC Capital Market unit in Toronto, said in e-mailed comments.

Turkey’s central bank intervened directly in markets on Oct. 18 for the first time since 2006, hours after selling $750 million of dollars in an auction. Reserves stood at $85.1 billion on Oct. 7, according to central bank data, equivalent to the country’s short-term external debt as of June.

“If the central bank’s intervention policy does fail, what is their fall-back policy option? A Hungarian-like aggressive policy rate hike. So that is the story which we are now positioned for,” said Anne.

Dollar Resources

Hungary raised interest rates for three consecutive months to curb accelerating inflation to 6 percent on Jan. 24. The Magyar Nemzeti Bank lifted interest rates to 11.50 percent from 8.50 percent in October 2008.

After today’s Turkish central bank announcement, “the story remains unchanged, so we are seeing the same market move,” Anne said.

The central bank has the resources to deal with the lira’s depreciation without a big rate increase, Yarkin Cebeci, economist at JPMorgan Chase & Co. in Istanbul, said in e-mailed comments.

The cost of insuring five-year Turkish debt rose for the third day after reaching a five-week low on Oct. 17. Credit- default swaps, which rise as perceptions of creditworthiness worsen and act as insurance for the buyer against losses on bonds, climbed six basis points to 260 today, CMA data show. Swaps on Hungary’s five-year debt rose five basis points to 514 today.

The extra yield investors demand to hold Turkish debt rather than U.S. Treasuries fell one basis point to 324, according to JPMorgan Chase & Co.’s EMB Global Index. That compares with 466 for debt of Hungary, which is rated two steps higher than Turkey by Moody’s at Baa3, the lowest investment grade.

--Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at

To contact the editor responsible for this story: Gavin Serkin at

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