Liveblogging Central Bank of Turkey Governor TV interview
Governor Erdem Basci is addressing the Bank’s communication problems with TV interviews this week, and business channel CNBC-e is first in line. As your friendly neighborhood economist as well as a dutiful Turkish citizen. Servet Yildirim is the interviewer.
BTW, CBT USD 60mn today.
Basci: This is a debt sustainability problem. You need a debt reduction problem, but you also need to support it with liquidity support. If these two are not there, you can go to a bad equilibrium. IMF and EMs have experience, but they don’t have much experience. but as they learn, they delay, but the problems can not accept delays. Especially in the European side, there were Masstricht rules, but there were no repercussions + no crisis resolution. Thy are elarning on the job.
In Europe, leaders convened so that the crisis would not spread to the big countries. Italy, Spain interest rates were 6%; this meant debt would increase. We had a MPC at same time.
Uppps, connections died for a couple of minutes…
Basci: We should look at spreads, borrowing costs. We told at the Inflation Report and bank economists meeting we could cut rates.
Italy and Spain are meeting ECB’s conditions. We should be looking at what ECB doing. But we had S&P decision on Friday. US Treasuries were safe haven; now a question mark has come. But we should not worry about US much, Europe’s problems are “more interesting”- ED: Basci is being PC:)
The biggest impact was after ECB bond-buying announcement.
Yildirim: Interest cut was a surprise. But now, many people say CBT is proactive. What kind of precautions are on the table?
There is a new precaution in MPC summary today: On FX depos, we could go to a cut, but we announced we could do that.
If more liq. is needed, we could easily fund the market. Then, the overnight would go to 5%; this would not impact much. Bur before, tghe overnight could go to 1.5%; that’s why we increased borrowing rate to 5%. There are some technical details that don’t need to be mentioned here (ED: check my addendum later today on these)
On FX, we have 1. FX selling auctions. 2. RRR cuts. If needed, we’ll go with more. 3. Banks’ one-week FX liquidity (ED: depos). We did not use this after the Lehman, as banks could get syndication credits. Each bank has a FX borrowing limit; we keep it a bit expensive so that CBT is lender of last resort, but if stress, we’ll owe this.
Yildirim: Before, you were saying don’t trust me to create uncertainty. Now, you say trust me. What do your policies mean for people on the street.
Basci: No one talks about TRY RRRs. We did not mention that. There are 2 scenarios: 1. Problems are solved, and if markets buy that. Then, all EM currencies will appreciate a lot. commodity prices increase as well. We’ll return to the old situation with ample liquidity. (early resolution scenarios). 2. Late resolution scenario: More pressure on the lira.
In both, we need cuts in policy rate. In 1, to decrease lira appreciation 2. Because of global recession, to support the economy. But for RRRs, different.In 1, we need to increase RRRs, but it won’t bear burdens on banks. We don’t want banks to try to grow aggressively, we will prevent that without increasing banks’ costs. In 2, we need to decrease TRY RRRs. We have not said anything on RRRs first.
Yildirim: Inflation?
Basci: We have some support on inflation from commodity prices. But if things get rough, we may even have an inflation below target. Now, our advantage is that we acted early. In Lehman, we did a similar thing; we were criticized, but were right. Then, inflation was below target, but analysts say it is because of Lehman, not CBT. The same thing happened in 2009, but we did not get credit despite economic recovery. But that’s OK, we are used to criticism (ED: someone is hurt)
Basci: The rate cut option is still open. But we showed this: CBT has the ability to decrease and increase rates. And this won’t have a big effect on FX. If you are doing something logical, markets will adjust (ED: too much confidence on markets)
Yildirim: What is risk of slowdown in our economy?
Basci: Not too much. In Lehman, we were hit through 3 channels: trade, financing, and expectations. Trade: Exporters are more ready because they are more competitive, because of productivity increases and currencies. Also, our exporters are experienced. Financing: We are very strong there with our precautions, in terms of FX TRY liquidity as well as the volatility of interest rates. Expectations: The public knows things are in control. The vatandas (public) is not too worried, as long as we make the public the right explanations at the right time, tell them the risks honestly. There are huge global risks, but we are ready.
Yildirim: Retail deposits? Did you see this trend? (ED: Yes, this is my favorite topic, as loyal readers would know)
Basci: We see selling in FX deposits in lira depreciation. This is normal, first in terms of portfolio weight normalization.
Yildirim: Do you see speculative pressure on lira?
Basci: FX market is very deep now; 1-2 institutions can not do that by themselves. But if there is risk aversion, Turkey will be sold along with everything else. He doesn;t have time to analyze (ED: I agree, traders buy/sell first, think later). But we are trying to decrease the impact on short-term rates.
Yildirim: Are there technical reasons for the currency to stay at this level.
Basci: We have flexible FX. We say it is not logical, in terms of fundamental or technical analysis, for lira to lose value further. We don’t talk much about currency. Now, we say there isn’t appreciation pressure on lira. We say this and stay quiet.
Yildirim: Open positions.
Basci: In Denizli, the real message was the impact of spreads on employment- these risk have real effects (I agree, as I told the same thing in the column). The blessed media instead concentrated on a side point.
Yildirim: Are you being understood.
Basci: Better understood with time. But we have to explain ourselves better (ED: you bet!)
Yildirim: How about credits?
Basci: We will reach credit in line with current account outlook. We have USD 45bn; our people expect USD 25-27.5bn deficit in the next six months. But if we are in 2nd scenario, we will be even below 25, as energy prices will fall. In July, we will see monthly figures around 5, then 4. But it can change. This corresponds to 9%; IMF expects double-digit, we don’t (ED: what is this fixation on double-digit)
Yildirim: FX pass-through
Basci: We think FX pass-through is 15%; we will release a policy note in that. The more we live under flexible FX, the less pass-thorugh will become.
Yildirim: Do you prefer people think you are targeting currency level.
Basci: CHF appreciating very clearly. Swiss Central Bank intervened. we don’t defend a level. But if lira depreciation continues, we will continue to sell FX, even increase it. But we are not targeting level. We say “FX determined in markets, but we think it should not depreciate further”
Yidkirim: What is optimal reserves? Will you change your reserves policy?
Basci: There is no problem; we’ll continue as before, and $ will not use reserve currency status. In 1 scenario, it is not given we will increase reserves, we will stop and see…
Yildirim: Fiscal?
Basci: There is a lot going on. We believ that in long-run fiscal discipline is better than boosting economy with deficits. Fiscal will most important factor for differentiating Turkish economy.
Yildirim: How should tax amnesty be used?
Basci: It is government’s policy, but we are government’s advisers. When we are asked, we give advice for fiscal discipline.
Yildirim: How successful are Fed and ECB?
Basci; They are my colleagues, I should not comment on them.
Yildirim: Is your term enough?
Basci: Let’s talk this later.
Yildirim: Some economists say: CBT policies wrong before crisis, right afterwards.
Basci: Let’s look at FSB, G20 texts. Financial sector discipline is very important. Everyone has understood this. Turkey put measures earlier because we had V recovery. We’ll see the benefits later on.
FIN!
Sorry for the lack of editing, but I need to head out. I may write my impressions tonight or tomorrow.
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