Central Bank of Erdogan Sends Foreign Cash Rushing Out of Turkey By

(Bloomberg) — With President Recep Tayyip Erdogan’s sacking of his third central bank governor in less than two years, Turkey’s dominant political leader of the past century has demonstrated yet again his determination to fight the conventions of modern economics.

Markets are again unpersuaded.

Investor flight drove the lira down as much as 15% on Monday, adding to losses that have kept inflation in double digits for the past 16 months. The yield on 10-year lira bonds rose by the most on record and stocks had their steepest drop since 2013.

“This is a sudden stop in capital flows,” similar to the currency meltdown in 2018, said Robin Brooks, chief economist of the Institute of International Finance in Washington. “The result back then was a deep recession due to tighter financial conditions. It’ll be the same now.”

Erdogan’s decision to fire Naci Agbal as central bank governor in the early morning hours Saturday followed a stunning 200 basis point interest-rate increase last week that drove the benchmark rate to 19%. In his four months in the office, Agbal had lifted the gauge by a cumulative 875 basis points — a direct contrast to the president’s unusual belief that higher borrowing costs fuel inflation. His moves helped stabilize the currency and attract investment.

What’s at Stake

While the Turkish president was looking at a year of strong growth and a stable lira as recently as last Thursday, his actions over the weekend have made Turkey a tougher sell to foreign investors. They’re critical to helping finance the country’s current-account deficit, which exceeded $36 billion in 2020.

The abrupt move at the central bank wrongfooted lira bulls who had come to believe in Erdogan’s apparent switch to mainstream economic policies in November, when he installed Agbal and appeared to cede to economic choices needed to contain spiraling prices that were eating into his popularity.

Erdogan hasn’t addressed the matter since naming a new chief of monetary policy, Sahap Kavcioglu, a Marmara University economics professor. Kavcigolu has occasionally written in support of Erdogan’s unorthodox ideas on interest rates in his column in the pro-government Yeni Safak newspaper.

The appointment stoked fears of a rerun of monetary policies of the past two years, pushing the lira 8.9% lower to trade at 7.8609 per dollar as of 4:53 p.m. in Istanbul on Monday. The currency did pare losses from as low as 8.35, with both state and private banks selling dollars from local investors, who saw the weak lira as an opportunity to take profit on dollar holdings, according to traders familiar with the flows.

State lenders didn’t appear to be defending a specific lira level as they did for much of the past two years when they were selling Turkey’s foreign FX reserves, the traders said, asking not to be…