Turkish lira slides 5% after central bank reserves drop $10 billion

(Updates story with latest lira/bond prices and Erdoğan comments from the ninth paragraph.)

Turkey’s lira slumped more than 5 percent on Thursday after central bank data showed that its reserves had fallen by almost $10 billion in three weeks.

The lira was trading down 4.7 percent at 5.58 per dollar at 6:04 p.m. in Istanbul after falling to as low as 5.62 earlier. Yields on 10-year benchmark lira debt climbed to as high as 19.12 percent, extending the weakest levels since October.

The Turkish central bank’s net foreign exchange reserves dropped to $24.9 billion in the week ending March 22, Bloomberg reported on Thursday, citing weekly data from the bank reported in liras. The decline followed a decrease of $6.3 billion to $28.5 billion in the two weeks to March 15.

But Central Bank Governor Murat Çetinkaya said later on Thursday that net foreign currency reserves had risen by $2.4 billion in the past week to $28.6 billion, according to state-run Anadolu news agency. While fluctuations in reserves may be observed, there is a rising trend in the medium term, he said.

The lira has swung between gains and losses this week after sliding more than 4 percent on Friday. Last week’s decline, also reminiscent of a currency crisis last year, forced the central bank to stop lending at its benchmark rate of 24 percent and to fund banks at higher rates of interest to help defend the lira.

Turkish assets are falling in value after stress in the offshore swaps market, where interest rates had surged to more than 1,000 percent on an annualised basis on Wednesday after liquidity dried up, raising concern for financial instability. Turkish banks began lending in the market again on Thursday and rates returned to levels of as low as 50 percent, Reuters reported.

The latest turmoil in Turkey’s financial markets precedes nationwide local elections on Sunday. President Recep Tayyip Erdoğan’s governing Justice and Development Party (AKP) is seeking to retain control of the capital Ankara and the largest city of Istanbul.

Erdoğan has labelled the currency crisis, which brought losses for the lira against the dollar of almost one third last year, and the most recent financial turmoil as a plot hatched by foreigners.

On Thursday, speaking in Ankara in comments broadcast on Twitter, Erdoğan repeated the allegations, saying the West, and the United States in particular, were to blame. He also said Turkey can only reduce inflation by cutting interest rates, a belief that confounds commonly-held economic theory.  

Turkish regulators began an investigation into U.S. investment bank JPMorgan on Saturday to see whether it manipulated the lira’s value through publishing a research report. That decision has added to investor nerves about putting money into Turkey.

Erdoğan said Western financial institutions are now reconsidering publishing research reports just prior to elections in Turkey.