In the last days of 2011, the Turkish Central Bank fixated on the exchange rate level which intervened in the market for selling around US $3 billion, and it continued the intervention January 2nf 2012. The markets perceive that the Central Bank had established a rate of 2.20 Turkish Liras for the euro-dollar baskets, which sells dollars while curbing lira liquidity when this level is breached. In accordance with finances and the statement delivered on the 2nd January the Central Bank is mopping up the liras as it gets in the exchange for dollars, all in all it refuses to provide liquidity in an effort to pressurize the exchange rates further in days to come.
The question of why Central Bank has fixated on the exchange rate? The official statement said “the aim is not to increase inflation even further from the current double-digit levels, but according to bankers and the Central Bank the foreign investors can enter the Turkish market at the 2.20 basket level. The only reason is the high level of Treasury debt repayments that rests in the first quarter.
If the situation prevails the Treasury would have to look for loans under high interest rates. Thus, the Central Bank may resort to such a path encouraging foreigners to buy government debt at the current levels, but it may also bring a sharp rise in interest rates. Despite this, the upper movement in rates has started and will continue to stabilize the financial position of the country.
In simple words the Central Bank is making the Treasury pay the bill, meanwhile the Treasury has been subjected to be in an effort to inflate its means by pen work as it enters in to tight three months ahead. According to bankers, the Treasury would not pay in cash as it tries to show high levels of year end means like it did so back in the 1990s. When it comes to foreign exchange the euro zone crisis goes on for another 4 months while Turkey already suffering from a lack of foreign currency inflow seems difficult to maintain the 2.20 level.
The Central Bank seems saturated with its levels of its forex reserves, but the net reserves are the ones suffering a quick meltdown. Gross reserves also seem high due to the opportunity of banks holding lira reserve requirements and gold accounts in foreign currencies.
Before the December 30th the intervention of gross reserves was at $92 billion, while the net reserves stood at only $55 billion and after the December 30th interventions of net reserves declined to around $5billion leaving a balance of $50 billion. Evidently, the Central Bank has burned at least $10 billion in reserves that has done nothing but to add pressure the economics of the country these figures explain the interest rates may be raised leaving Treasury to pay the bills.
The Central Bank was made unable to control and afford the exchange rates, due to which curbing lira liquidity and selling dollars became difficult, and no foreign investors remained active in the market from December 30th to January 2nd.
From 3rd January onwards, foreign investors have entered the market while the real effects will be observed from the next week. The banks also have their eyes on what the foreign investors would do. If they enter the market with the intention to sell, it would be very hard for the Central Bank to halt exchange rate appreciation.