Turkish lira rebounds but concern lingers after selloff
* Lost confidence among Turks seen behind selloff
* Erdogan: 'heavy price' for bankers expecting lira fall
* Surge in money markets, CDS after government clampdown
* Central bank takes unorthodox steps to prop up lira
(Recasts with broader financial market stress; adds comments
from bank client and analyst; updates throughout)
By Ezgi Erkoyun and Ece Toksabay
ISTANBUL/ANKARA, March 25 (Reuters) - The Turkish lira
partially recovered on Monday after last week's punishing
selloff, even as investors grew alarmed that Turkey's government
responded by threatening bankers and investigating their foreign
Last week's meltdown was the lira's worst since August when
a full-blown currency crisis took hold and tipped Turkey's
economy into a recession that could last deep into this year.
The selloff, which came just over a week before local
elections across the country, was driven by Turks losing
confidence in the lira and buying more foreign cash as the
country's ties with Washington deteriorated, bankers said.
The central bank took unorthodox steps that stemmed the flow
of foreign exchange and helped boost the lira to
5.57 against the U.S. dollar at 1450 GMT, more than 3 percent
stronger than Friday's close. It had weakened to 5.8490 on
Friday before settling at 5.7625, still its worst closing value
Turkey's main stock index tumbled for a second day and, more
worrying for foreign investors, there was a surge in both
Turkish money market rates and the cost of
insuring exposure to the country's sovereign debt.
Analysts said these financial markets were reacting sharply
to the government's heavy-handed response to Friday's selloff.
President Tayyip Erdogan warned at the weekend that bankers
betting on lira depreciation would pay "a very heavy price"
while financial regulators opened three separate probes into
JPMorgan and other banks for providing misinformation,
stoking volatility and pushing clients to buy foreign
"With archaic measures of this kind he (Erdogan) will scare
away even the last courageous Turkey investor," said Ulrich
Leuchtmann, head of FX & EM research at Commerzbank in
"Who would want to invest in a currency that's valuation is
only based on fear?"
'PROTECTING THE FUTURE OF THE KIDS'
The lira's apparent fragility echoed last year's crisis in
which it lost about 30 percent of its value against the dollar,
leading to a spike in inflation and prompting the central bank
to hike its key interest rate to 24 percent.
The Turkish government cast the 20018 crisis as an economic
attack by foreign powers and encouraged Turks to buy lira to
stop the weakening. At an election rally on Sunday, Erdogan said
"some people" had begun provoking Turkey and were attempting to
make the lira decline against foreign currencies.
But bankers told Reuters the lira's weakness was driven by
individual Turkish investors souring on the weak returns they
received from lira deposits, and turning to dollars and other
The foreign currency savings of local investors rose by
$1.64 billion to a record high of $105.7 billion in the week to
March 15 after climbing consistently for nearly six straight
months, central bank data showed.
At a large private bank in central Ankara, Orhan, who
declined to give his surname, said he recently converted his
savings to dollars to protect his children's inheritance.
"This is not treason to the country, but it's protecting the
future of our kids," he said.
"You can't put out the fire of dollars by uttering threats
to the markets. Those who are ruining our economy should look at
the mirror if they want to see traitors."
Turkey's main BIST 100 share index slid 0.51 percent on
Monday, led by a decline in banks stocks, after tumbling on
Friday to its lowest close since January. It was dragged lower
in part by a global selloff in emerging market stocks over
growing fears of a possible U.S. recession.
Meanwhile, Turkey's 5-year credit default swaps jumped to
levels last seen in September and two of Turkey's money market
rates rose over 29 percent.
Overhanging the volatility are March 31 local elections for
which Erdogan has been campaigning hard for his AK Party.
The investigations into JPMorgan were around complaints that
a research report it published caused speculation in the
Istanbul bourse and hurt the reputation of banks, according to
Turkey's banking and market regulators.
The report, obtained by Reuters, suggested clients go "long"
on the dollar in advice typical of such notes.
A JPMorgan spokesman for the region declined to comment.
Governor Murat Cetinkaya was quoted on Monday as saying the
central bank's main policy is to keep its reserves strong. The
central bank turned to what analysts called "back door"
tightening measures including not opening foreign-exchange repo
or depo auctions.
The lira remains "extremely vulnerable" to shocks and
investors are "a bit jittery" despite Monday's gains, said Jason
Tuvey, senior emerging markets economist at Capital Economics.
"Geopolitical concerns and any comments from Erdogan
regarding monetary policy, if he tries to say the central bank
should reverse course, then the lira may come under pressure
again," he said.
(Additional reporting by Nevzat Devranoglu in Ankara, Daren
Butler and Ali Kucukgocmen in Istanbul, and Karin Strohecker and
Marc Jones in London; Editing by Jonathan Spicer and Ed Osmond)
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