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Turkey’s central bank burnt through almost $12bn defending the lira in a record intervention after President Recep Tayyip Erdoğan’s detention of his political rival triggered a political crisis that scared investors and sent the currency reeling.
The bank spent $11.5bn propping up the currency on Wednesday after the detention of Istanbul’s mayor, Ekrem İmamoğlu, the most prominent leader in Turkey’s political opposition, said a person with knowledge of the matter and calculations based on official data by Bürümcekçi Research and Consultancy.
The intervention was nearly four times larger than any previous such move on the bank’s official records. It came after the lira plunged as much as 11 per cent against the US dollar to a record low on Wednesday as Erdoğan’s move against İmamoğlu ignited a stampede out of Turkey’s markets.
One Turkish banker said the officials had “lost control” of the market early on Wednesday, adding it had “left a scar” on investors’ confidence.
JPMorgan Chase, a major player in emerging market finance, also noted “lira liquidity was impaired amid large outflows” on Wednesday.
The central bank declined to comment.
Analysts say the central bank likely continued intervening in the market on Thursday and Friday.
Policymakers have taken other steps to soothe markets this week, including holding an emergency central bank meeting on Thursday in which a key overnight interest rate was increased in an attempt to keep local savers in lira accounts rather than switching to dollars.
The actions have eased the lira’s decline, leaving the currency down 3 per cent for the week, though Istanbul’s Bist 100 share index tumbled almost 8 per cent on Friday in its worst week since 2008.
İmamoğlu — who has emerged as the most serious political challenger to Erdoğan during his two decades in power — was expected to run as presidential candidate for his opposition Republican People’s party (CHP), which was hoping to force early elections.
The arrest has triggered days of unrest, with the CHP calling for more protests at the weekend. Erdoğan on Friday denounced the demonstrations as “street terrorism”.
This week’s political upheaval represents a major setback to a sweeping economic reform programme that began after Erdoğan’s re-election in 2023.
The programme led by Mehmet Şimşek, a former Merrill Lynch banker, aims to quell Turkey’s long-running inflation crisis and woo investors who have fled over the past decade as the president has slid towards autocracy and pursued unorthodox monetary policy.
Şimşek’s programme has included huge rises in interest rates — reversing Erdoğan’s previous insistence on holding rates low despite runaway inflation — and increases in taxes.
It has shown some signs of success with inflation down to 39 per cent from above 85 per cent in late 2022. Turkey has also rapidly rebuilt its foreign currency war chest after it was depleted as Erdoğan’s government sought to prop up the economy and lira ahead of the 2023 election. Gross foreign currency reserves had risen to almost $100bn, prior to this week’s interventions, from about $57bn in mid-2023.
Long-term investors have remained cautious about investing in Turkish assets out of fears Erdoğan will pivot back towards unorthodox economic policies, as he has done in the past.
But hedge funds and other investors looking to take advantage of interest rates of above 40 per cent have placed roughly $35bn in so-called “carry trades”, when traders borrow in low-yielding currencies to bet on high-yielding ones, according to JPMorgan.
