President Recep Tayyip Erdogan effectively banned Turkish entities from conducting business in dollars or euros, triggering a brief rally in the battered lira. Then he doubled down on demands for the central bank to cut interest rates, triggering a fresh selloff in the national currency.
The Turkish leader published a decree Thursday making the lira the only legal currency for most contracts concluded between Turkish entities for any kind of product or service. Many of his own government’s largest contracts, including for building motorways and operating turnpikes, bridges and airports, are currently priced in dollars or euros.
Some agreements will be exempt from the new rules under conditions to be specified by ministries, according to the decree, which didn’t elaborate. All others that are either priced in or indexed to foreign currencies will have to be amended within 30 days. Nobody from the government provided clarity immediately.
This decree will create “total chaos' and be impossible to implement in the given time frame, said Hulusi Belgu, head of the national organization of shopping malls. His members have about $15 billion in collective debt and price about 70 percent of all their rent contracts in a foreign currency, he said.
“How will this debt be repaid if contracts are converted to liras?' Belgu asked by telephone.
About half of the Turkish banking system’s deposits are in foreign currencies, partly a result of runaway inflation. The nation’s companies have racked up more than $330 billion in foreign debt, with a foreign-exchange shortfall of $216 billion. It’s common in Turkey to index contracts for everything from cars to rents and business services to dollars or euros.
The lira has lost 40 percent against the dollar this year, buffeted by government pressure on the central bank not to raise interest rates and political spats with major partners including the U.S. The central bank meets at 2 p.m. to decide on rates, with investors pushing for an increase of several hundred basis points to restore credibility and backstop the currency.
But Erdogan, a dogged contrarian on monetary policy, reiterated his calls for rate cuts during a speech in the capital Ankara just hours after his decree was published.
The president called fluctuations in the economy “fake' and criticized the central bank for failing repeatedly to meet its inflation target, saying that those who claim higher interest rates cause inflation -- the textbook view -- “don’t know this business.'
The lira plunged on the remarks, dropping 1.5 percent against the dollar to 6.4442 as of 12:25 p.m. in Istanbul. The index of real estate investment trusts fell 1.4 percent on the Borsa Istanbul, outpacing declines on the broader index. An index of transportation companies’ shares dropped 3.7 percent, the most among sub-indexes on the bourse.
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