Main elements of crisis remain unaddressed, with eventual bailout most probable outcome
Until reports came on Thursday night that the US was preparing to impose more sanctions, the Turkish government had had a decent few days. The currency crisis, which threatened to become chaotic on Monday, had improved. The lira had almost returned to its level of a week ago. During that time, the country had increased liquidity in its banking system, unveiled $15bn (£11.8bn) of direct investment from Qatar, announced a clampdown on short-sellers and on Thursday its finance minister, Berat Albayrak, talked the language of fiscal discipline on a phone call with investors. There have been worse fightbacks.
Yet there is a big difference between buying time and turning a corner. Turkey has merely achieved the former. All the main elements of the crisis remain unaddressed. The Qatari money was pledged at impressive speed but the external funding requirement is enormous – about $220bn during the next 12 months, economists estimate.
Wall Street is on a tear today, with the Dow Jones up more than 400 points (or 1.6%) in afternoon trading.
Traders seem to be much more relaxed about Turkey and US-China trade wars than yesterday. Perhaps too relaxed, given we’ve only seen modest progress on both issues today….
#StupidStock Move of the Day! Can I give to whole market? Of course I can. It’s my “award.” Yes, fear about China-US trade spat & Turkey currency crisis may have been overdone. But market acting today like GW Bush putting up “Mission Accomplished” banner. No more worries? Really?
Ouch! President Trump also told his cabinet meeting that Turkey hasn’t been a good friend, according to reports.
The United States and Turkey have exchanged tit-for-tat tariffs in Trump’s attempt to persuade Turkish President Tayyip Erdogan to give up Brunson, who denies charges that he was involved in a coup attempt against Erdogan two years ago.
“They have not proven to be a good friend,” Trump said of Turkey during the Cabinet meeting. “They have a great Christian pastor there. He’s an innocent man.” ….
Turkey’s conference call with investors failed to really address one key issue — whether interest rates will be raised sharply to support the lira (as some economists believe must happen).
Robert Ward of the Economist Intelligence Unit say this is a big concern:
Albayrak’s plan to stabilise Turkey’s economy invites scepticism. Fiscal policy to do heavy lifting via cuts. Little to say on interest rates. Thus Erdogan’s dotty views on rate rises/inflation still prevail. CB independence/lack thereof thus still a key risk to stability.
The lira has pared some of its earlier gains, following Mnuchin’s threat to roll out more sanctions on Turkey.
It’s now trading at nearly 5.9 lira to the US dollar, compared with 5.7 earlier.
“We have put sanctions on several of their cabinet members,” Mnuchin told a cabinet meeting. “We have more that we are planning to do if they don’t release him quickly.” https://t.co/YY9zMnW91P
NEWSFLASH: America has signalled it will impose more sanctions on Turkey, unless US pastor Andrew Brunson is released from house arrest.
The threat comes hot from the White House, where Donald Trump has been holding a cabinet meeting.
After plunging in early trading on Monday, it’s fought its way back as Ankara has clamped down on currency speculation, urged the public to help resist the ‘economic war’, and tried to reassure investors.
After heavy falls for the miners in the previous session, today the miners were the top sectorial gainer as metal process rebounded.
News that China is sending a trade delegation to Washington for the first attempts at trade talks since the US levied tariffs on $50 billion of Chinese imports has boosted optimism that a deal between the two powers is still a possibility, even if a distant opportunity. Notably senior Chinese officials won’t be in attendance, showing a level of caution from China over the ability of the two sides to reach a deal.
Turkey’s pledge to strengthen its fiscal position (see earlier post) is likely to mean tough spending cuts.
Turkey has set out plans to cut spending to bolster the lira as it seeks to navigate a way out of the crisis that has hit the currency and shaken emerging markets.
In a much-anticipated conference call with 6,000 investors, Berat Albayrak, finance minister, indicated the country would largely use fiscal measures to slow down the economy and reduce a hefty current account deficit and inflation running at 16 per cent.
This chart shows how Turkey’s external borrowing has risen sharply in the last few years, as a credit boom has driven growth:
Cristiana De Alessi of BNP Paribas has given Turkey’s new finance minister some credit for his comments today, but warned that Turkey faces a struggle.
She cites Turkey’s reliance on external funding (its corporate sector owes around $220bn in foreign debt, according to CNBC):
“The finance minister provided some comfort by acknowledging that rebalancing the economy is a priority through both fiscal and monetary policy and that capital controls aren’t an option.”
“The MTP (medium term programme) released in September will be key to see what concrete steps will be taken to turn this into sustained action. It will also provide a benchmark to measure the new government’s progress.
Per Hammarlund, chief EM Strategist at Nordic bank SEB, fears that Turkey could be forced to seek help from the IMF — despite Albayrak’s pledges today.
Turkish Finance Minister Berat Albayrak continues to reassure investors that Turkey will address its structural problems, but at this stage crisis measures, including sharply higher policy rates, a tightening of fiscal policy and support to troubled sectors such as construction, retail and banking will be key.
“In sum, the economy is set to slow down sharply. The Central Bank of the Republic of Turkey (CBRT) has been forced to hike interest rates sharply [earlier this year], which will have a dampening effect on credit growth. It will also increase default rates and the need for debt restructuring, hurting banks’ asset quality.
“It was Albayrak’s first investor call. In general, I found it successful as the rhetoric suggests that they are aware of the problems in Turkey’s economy and reasonable solutions are being prepared. It’s very valuable that they underlined the negative effects of inflation on the economy and the target of single digit inflation was emphasized.”
“I also find the sustainable growth goal important. The importance of fiscal discipline was stressed. In a nutshell, it shows that problems of the economy can be discussed with investors and confidence can be restored.
Market much more impressed than I am. Always an uncomfortable feeling.
“Turkey has never implemented non-market based measures…such as capital controls, and are not in our agenda. Open market based economy principles will always be at the center of our macro framework”
That was a good thing to say
Turkish finance minister just ended the call by asking all of us to visit Turkey. Nice trick to get in some hard currency!
In all seriousness, Istanbul is incredible, and if you haven’t been, you should go ASAP
The lira is continuing to strengthen, following Berat Albayrak’s conference call.
It has now gained around 4.5% today, meaning one dollar is worth 5.7 lira, down from almost 6 lira to the dollar last night.
Heres are the key points from Berat Alkayrak’s first major performance before international investors:
Albayrak messages on investor call: Tight fiscal policy, coordination of fiscal and monetary policy, fight against inflation without giving up on growth., no planned capital controls. Most striking line: “We don’t expect fines on Halkbank” – latest on @Reuters screens
LIVE — Treasury and Finance Minister Berat Albayrak (in conference call with over 6,000 international investors): Turkey will come out of this volatility stronger, the Turkish banking sector is healthy and strong; we will not compromise on fiscal discipline pic.twitter.com/Y8sB3gDMLk
Turkish Treasury Minister Albayrak:
• No capital controls would be ever imposed • No IMF stand-by deal instead will focus on FDI • Don’t expect U.S. fine against Halkbank • Support and additional funding would be provided to banks if necessary
Thousands of investors had piled onto the conference call. That shows the level of interest in Turkey’s predicament around the globe.
Albayrak ends the call by saying he’s like to meet investors soon.
[Background: Some institutional investors have grumbled that Albayrak hasn’t been willing to meet them and has been taking a ‘bunker mentality’ since becoming treasury and finance minister in July]
Earlier in the call, Berat Albayrak said he doesn’t expect state-owned Turkish bank Halkbank to be fined by America for allegedly helping Iran evade U.S. sanctions.
Halkbank’s shares have jumped by 3.6% on this news.
On US sanctions, Berat Albayrak says Turkey will turn to other parties – such as China and Germany – help it navigate the current situation.
Here’s Reuters’ first take on Albayrak’s conference call (which is still going on):
Finance Minister Berat Albayrak said on Thursday Turkey won’t hesitate to provide support to the banking sector, which was capable of managing current volatility, and there has not been major deposit flow from banks lately.
In a conference call with investors, Albayrak said Turkey had already taken measures to curb forex funding and corporate sare in a comfortable position to meet short-term liabilities.
Albayrak is now talking about the need to co-ordinate fiscal and monetary policy.
In other words, the government and the central bank need to work together to fight the crisis.
Here’s Albayrak’s take-home message for investors:
“We are experiencing unfavourable conditions, but we will overcome.” — Turkish Finance Minister Albayrak
Newsflash: Berat Albayrak says Turkey doesn’t have any plans to bring in capital controls [ie, restricting bank withdrawals and the movement of money in and out of the country].
It also isn’t planning to turn to the International Monetary Fund, he tells investors.
On the fiscal side of things, Albayrak says Turkey wants to boost its primary budget surplus.
All ministries have been asked to contribute to an “ambitious savings programme”.
Albayrak says that reducing inflation is Turkey’s top priority; it wants inflation to be in ‘single-digits’ as soon as possible.
[Currently Turkish inflation is running at 15%]
More snaps from Bloomberg:
*ALBAYRAK TELLS INVESTORS #TURKEY FULLY RECOGNIZES CHALLENGES – BBG *ALBAYRAK TELLS INVESTORS TURKEY BANK SECTOR HEALTHY, STRONG *ALBAYRAK TELLS INVESTORS TURKEY DID BANKS STRESS TEST RECENTLY *VOLATILITY IN TURKEY NOT TRIGGERED BY FUNDAMENTALS: ALBAYRAK
The crucial conference call between Turkey and thousands of investors is underway!
Finance minister Berat Albayrak began by telling the call that Turkey will emerge from the current period of volatility stronger.
Turkish Fin Minister presser starts:
TURKEY CENBANK RESERVES MORE THAN $90B
TURKEY BANKS’ CAD AT PRUDENT LEVEL EVEN IN WORST CASE 16% CAPITAL ADEQUACY RATIO
Just in: Donald Trump’s top economic advisor has hailed the strength of the US dollar – even though it’s causing serious pain in emerging markets.
“There’s a lot of unrest around the world. Money is flowing into the U.S.A. That’s terrific.
“By the way, a strong dollar holds down commodity prices, gasoline prices are slipping, oil prices are slipping”.
Our Economy is doing better than ever. Money is pouring into our cherished DOLLAR like rarely before, companies earnings are higher than ever, inflation is low & business optimism is higher than it has ever been. For the first time in many decades, we are protecting our workers!
Newsflash: President Erdoğan has spoken by phone to French president Emmanuel Macron.
The two leaders “emphasised the importance” of improving bilateral investment, and economic and trade relations, according to the Turkish side.
Meanwhile in the UK, retail sales have bounced back thanks to the heatwave (which seems to have bunked off today, alas) and the football World Cup.
retail sales rebound into July (“as people continued to enjoy the World Cup and the sunshine” – ONS). 3m/3m rate very strong, but likely to slow further into Q3 when effects of strong April / May wear off. pic.twitter.com/8wXUhWb2AE
Turkey needs to make four changes to persuade the markets that it’s serious about tackling its credit binge, argues Holger Schmieding of German bank Berenberg.
And, awkwardly for Berat Albayrak, that includes appointing a finance minister who isn’t married to president Erdoğan’s daughter. It also includes tightening government spending, and giving the Turkish central bank the freedom to raise interest rates (something Erdoğan is opposed to).
Some worry that Mr Albayrak and his team are simply out of their depth, having been caught off-guard by an economic and political crisis just weeks into the job.
“I have concerns that they fully comprehend the root of this problem,” said a person who has dealt with members of Mr Albayrak’s team.
Berat Albayrak’s family connections make it harder for him to establish confidence with investors.
After all, it’s possible that the best possible candidate to become finance minister is also the president’s son-in-law. But it’s not a great look.
Albayrak must convince jittery markets that Turkish monetary policy will be determined by economic reality – and an independent central bank – rather than the powerful family chief behind his meteoric rise.
Economists attributed the lira’s modest recovery on Wednesday to central bank measures which squeezed lira liquidity, raising borrowing costs without hiking the benchmark interest rate.
Berat Albayrak’s rise to power has attracted comparisons to another well-connected son-in-law, Jared Kushner.
My colleague Martin Chulov explains how Albayrak has shimmied up the greasy pole:
Albayrak completed a master’s of finance at New York’s Pace University, before completing a PhD in Turkey. In 2006, two years after his marriage, he was appointed the chief executive of the energy and media conglomerate Çalık, a role that opened connections across the region. In 2015, Albayrak was named energy minister – the same year he became an MP. By later that year he had begun to consolidate political power, moving from one of the country’s most influential businessmen to a figure at the heart of the power base – and unmistakably tied to his father-in-law.
He displayed a ruthless streak, eliminating perceived rivals within the ruling AKP party, such as Turkey’s then prime minister, Ahmet Davutoğlu, and anyone perceived to be disloyal to Erdoğan.
There are encouraging signs for Turkey in the financial markets today:
Turkish lira rallying strongly for third day in three. Unlike earlier in the week, signs of life in the bond market, rates about 50bps lower, still underwater for this week.
#Lira has gained close to another 2.5% so far today, now seems to be within reasonable touching distance of the start of crisis last Friday. I never thought it could recover so soon. Let’s see what happens next. #usdtry#Erdogan
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Let’s wait & see how the Investor Conference Call goes later today. Call actually will take place at 4pm local time (9am EDT.) Not out the realm of possibilities Trump Admin may try to steal Fin Min Albayrak’s thunder with additional sanctions , as Brunson not released Wednesday.
Finance minister out to convince investors but threat of fresh US sanctions looms
Turkey’s finance minister sparked a recovery in the lira after he addressed thousands of international investors, pledging to protect beleaguered local banks and cut public spending to prevent the country defaulting on its loans.
Berat Albayrak, who has faced criticism for failing to tackle the country’s growing financial crisis, spoke to around 6,000 investors on a conference call to rebuff concerns that a funding squeeze on Turkey’s banks and a damaging trade war with the US would force him to seek a rescue bailout from the International Monetary Fund (IMF).
When Cisco bought Ann Arbor, Michigan security company, Duo for a whopping $2.35 billion earlier this month, it showed the growing value of security and security startups in the view of traditional tech companies like Cisco.
“We recently announced our intent to acquire Duo Security to extend our intent-based networking portfolio into multi- cloud environments. Duo’s SaaS delivered solution will expand our cloud security capabilities to help enable any user on any device to securely connect to any application on any network,” he told analysts.
Indeed, security is going to continue to take center stage moving forward. “Security continues to be our customers number one concern and it is a top priority for us. Our strategy is to simplify and increase security efficacy through an architectural approach with products that work together and share analytics and actionable threat intelligence,” Robbins said.
That fits neatly with the Duo acquisition, whose guiding philosophy has been to simplify security. It is perhaps best known for its two-factor authentication tool. Often companies send a text with a code number to your phone after you change a password to prove it’s you, but even that method has proven vulnerable to attack.
What Duo does is send a message through its app to your phone asking if you are trying to sign on. You can approve if it’s you or deny if it’s not, and if you can’t get the message for some reason you can call instead to get approval. It can also verify the health of the app before granting access to a user. It’s a fairly painless and secure way to implement two-factor authentication, while making sure employees keep their software up-to-date.
Duo Approve/Deny tool in action on smartphone.
While Cisco’s security revenue accounted for a fraction of the company’s overall $12.8 billion for the quarter, the company clearly sees security as an area that could continue to grow.
Cisco hasn’t been shy about using its substantial cash holdings to expand in areas like security beyond pure networking hardware to provide a more diverse recurring revenue stream. The company currently has over $54 billion in cash on hand, according to Y Charts.
Cisco spent a fair amount money on Duo, which according to reports has $100 million in annual recurring revenue, a number that is expected to continue to grow substantially. It had raised over $121 million in venture investment since inception. In its last funding round in September 2017, the company raised $70 million on a valuation of $1.19 billion.
The acquisition price ended up more than doubling that valuation. That could be because it’s a security company with recurring revenue, and Cisco clearly wanted it badly as another piece in its security solutions portfolio, one it hopes can help keep pushing that security revenue needle ever higher.
Currency rises from record low against US dollar but investors remain anxious at lack of interest rate rise
Turkey’s lira continued its recovery on Thursday, ahead of a crucial conference call between the country’s finance minister and international investors.
It rose 2.5% in early trading, with one dollar buying 5.8 lira. A diplomatic spat with the US helped send the lira into a tailspin last week and it hit a record low of 7.2 to the dollar on Monday, sending tremors through emerging markets. However, the lira remains about 20% below where it was a month ago.