MNI Policy: Central Bank Independence Key For IMF In Turkey

By Luke Heighton

     LONDON (MNI) - Turkey's refusal to raise interest rates despite soaring

inflation could render a bailout "out of the question" if it is forced to seek

help from the International Monetary Fund, a senior European source said.

     The Turkish lira has weakened sharply amid concerns over President Recep

Tayyip Erdogan's influence over the central bank, prompting fears that companies

and banks might struggle to meet dollar and euro liabilities. The president

insists that interest rates cause inflation, hampering a key policy tool in a

country facing a current account deficit running at over 5% of gross domestic

product.

     Further lira deterioration could endanger financial stability, but Turkish

Finance Minister Berat Albayrak has said he has no plans to seek Fund support

and the hold over the central bank of a national president who insists interest

rates cause inflation might rule it out anyway.

     "The IMF is almost out of the question. Increasing the interest rates is

the most logical thing he has to do anyhow. Whether or not he goes to the IMF

needs to be seen, but whatever he does if he goes to the IMF first they will

also force him to raise interest rates," the source told MNI.

     'Why should you invest in Turkey if you don't even have an independent

central bank, that's the question. What can the finance minister do? Basically,

he can revert to capital controls," the source said. "With capital controls it's

rather easy to get in, and rather difficult to get out again. And he [Erdogan]

publicly said he will not do capital controls, but that's what everybody fears.

So nobody is investing, because they fear the capital is trapped."

     A row over the detention of an American pastor prompted Washington to

impose tariffs on Turkish goods, leading to a renewed selloff of Turkish assets

and government bonds in the first half of August, and sending the lira crashing

through to an all-time low of 7.24 to the dollar from less than 5 at the end of

July. In response, the Central Bank of Turkey offered to support local banks,

cancelled its one-week repo auction and narrowed the interest rate corridor on

overnight lending. Combined with an offer of financial support from Qatar, this

helped the lira rally. It fell 1.9% to 6.25 by 3:25 p.m. in Ankara today.

     Investors have also been unnerved by purges of Erdogan's political

opponents since a failed coup in 2016, including the dismissal of more than

100,000 state employees and a crackdown on critical media and the opposition.

The appointment after June elections of Albayrak, Erdogan's son-in-law, as

finance minister added to suspicions of declining democratic legitimacy.

     The Turkish president may be courting even closer ties with Qatar, and with

Vladimir Putin in a bid to raise funds, while circumventing perceived enemies in

Europe and the United States. Erdogan will sit down with Russian and Iranian

leaders in Iran on September 7, with developments in Syria and how to deal with

radical Islamic groups operating there among topic for discussion.

     "That would be good for Russia, which at the end is pretty isolated. That

would be something from a diplomatic standpoint you would watch very, very

closely," the source said.

     "Russia is the most dangerous. That would have a direct effect on NATO

membership. NATO would look very different without Turkey, because it's an

important post. But Mr Trump doesn't care."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com