Turkey Central Bank estimated to have burned through $10-25 bn in FX reserves to defend currency

Turkish stocks were set for their worst week since the aftermath of 2008's Lehman Brothers collapse on Friday as concerns about this week's detention of President Tayyip Erdogan's main political rival refused to subside.  Without the aid needed from the Finance Ministry, Central Bank (CBRT) is left to fend off the panic by its own means.  Different reports estimate it has burned FX reserves between $10-25 bn since the beginning of the current turmoil, triggered by the arrest of CHP Istanbul mayor Mr   Ekrem Imamoglu. The lira was set for a 4% weekly slump despite aggressive action from Turkey's central bank in recent days while the latest selloff in stocks triggered two market-wide circuit breakers on Borsa Istanbul. The benchmark BIST-100 index is on track for a 15% weekly plunge - its worst drop since the global financial crisis in October 2008.   [embed]https://www.youtube.com/watch?v=8qnXs2jOFCo&t=52s[/embed] Turkey's sovereign dollar bonds also slid for the third straight day, with the longer-dated issues shedding 2 cents and on track for a weekly loss of more than 3 cents, their largest since January 2024. The cost of insuring Turkey's debt against default also widened by 18 basis points to 322 bps, data from S&P Global Market Intelligence showed, the widest levels since March 2024. While the Turkish lira traded at 38.0050 against the U.S. dollar, flat from the previous close and above Wednesday's record low of 42, the currency is down 6.7% so far this year.     According to Reuters, the Central Bank sold some $10 billion in FX after Wednesday's record low, according to economists' calculations, and took liquidity measures to limit volatility and ease FX demand.   The bank spent $11.5bn, estimates FT,  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.   Former Central Bank chief economist Professor Kara estimates the Bank’s reserve burn at $25 bn in in X posting. [embed]https://www.youtube.com/watch?v=S4B9-dbQDRI&t=4s[/embed] To calm down the currency market, increased the overnight lending rate, which is the upper band of the interest rate corridor, to 46.0%, but kept the weekly repo rate at 42.5% and the overnight borrowing rate at 41.0%.  Sources close to CBRT, speaking to Turkey on the condition of anonymity, the governors are determined to stop a flight to FX from TL, preparing to raise rates, if necessary.  Additionally, CBRT may urge the Treasury, under the control of economy czar Mehmet Simsek to zero the 15% withholding tax on TL deposits, to increase their attractiveness vs.  holding FX.   CBRT still has ca $150 bn in gross reserves to defend the currency, more than sufficient to finance a potential exit by all foreign financial investors.  Yet, a massive migration of  domestics from TL to hard currencies will rapidly burn up its ammunition, forcing it to raise interest rates by at least 500 basis points, which might or not be approved by President Erdogan.     Comments by PA Turkey staff     IMPORTANT DİSCLOSURE:  PA Turkey intends to inform Turkey watchers with diverse views and opinions.  Articles in our website may not necessarily represent the view of our editorial board or count as endorsement.     Follow our  English language YouTube videos  @ REAL TURKEY:   https://www.youtube.com/channel/UCKpFJB4GFiNkhmpVZQ_d9Rg And content at Twitter: @AtillaEng Facebook:  Real Turkey Channel:   https://www.facebook.com/realturkeychannel/