Turkey Hit By Bank Runs, Currency Panic As Locals Sell Their Cars And Houses To Buy Gold While Lira Implodes

It has been an miserable five years for Turkish citizens who have seen their purchasing power slashed by more than half, and it's only getting worse.

The Turkish lira has cratered against the dollar and most developed currencies, plunging from 3 TRY per dollar, to a record low 7.37 last week after a brief and valiant attempt at imposing shadow capital control by Erdogan (who is now de facto head of the Turkish central bank) failed miserably at the end of July, and not even a draconian hike in overnight funding rates above 1000%  last week (to crush the shorts) was able to prevent a plunge in the Lira to new all time lows.

As their currency implodes (in a nation that is becoming increasingly more "banana" with each passing day as Erdogan solidifies his takeover of every government institution, in the process turning off any potential foreign investors) Turks are discouraged from material purchases of dollars to hedge the collapse in their native currency due to some of the strictest capital controls on the planet, which has left them with just one option.

As Reuters reports, Hasan Ayhan followed his wife’s instructions last week and took their savings to buy gold at Istanbul’s Grand Bazaar as Turks scooped up bullion worth $7 billion in a just a fortnight while their currency went up in flames.

Goldsmith at the Grand Bazaar in Istanbul, Turkey. Photo: Reuters

The retired police officer, hit by vivid memories of the 2018 currency crisis which saw the Lira lose 30% of its value virtually overnight, was among those playing it safe as he queued in the city’s sprawling covered market, where a screen showed the gold price rise by one Turkish lira ($0.1366) in just 10 minutes.

What's more, it now appears that locals are choosing gold over the dollar, perhaps because the dollar has also been tumbling against gold in recent weeks due to the Fed's overt attempts to debase the greenback.

"I think it is the best investment right now so I converted my dollars to buy gold," the 57-year-old said, adding: "I might withdraw my lira and buy gold with it too, but I am scared to go to the bank right now because of coronavirus." 

Well, Hasan, for people in Turkey it is the best investment, but there is a rather high chance that Erdo pulls an FDR and makes it illegal for anyone in Turkey to own gold so you and your fellow countrymen may want to have a series of unfortunate boating accidents in the coming weeks.

In any case, the day after Ayhan bought his gold on Aug 6, the lira hit a historic low and has continued to slide, laying bare concerns that Turkey’s reserves have been depleted by market interventions, which are showing signs of fizzling out, even as the central bank and president flood the local airwaves with fake news about monetary stability and urge locals to keep their money in lira.

Only this time it's not working: turks have traditionally used gold as savings and there may be as much as 5,000 tonnes of it "under mattresses", with more added after the recent buying spree, Mehmet Ali Yildirimturk, deputy head of an Istanbul gold shops association, said.

And although gold has never been more expensive - in either lira or dollar terms - vendors at Istanbul's Grand Bazaar said almost no one is coming to sell their gold jewellery. There are only buyers.

"I’ve been chatting with hundreds of people who are thinking about selling their cars or houses to invest in gold," said Gunay Gunes, whose busy booth is near the market’s entrance.

Gold dealer Gunay Gunes selling gold for Turkish lira: Photo: Reuters

Putting the recent gold-buying frenzy in context, in just the last three weeks, as selling gripped the lira local holdings of hard assets such as dollars and gold jumped $15 billion to a record of nearly $220 billion, making a mockery of the central bank's attempts to halt the currency slide.

While the dumping of the lira has eased off a bit this week, when the lira hovered around 7.3 versus the dollar, it remains among the worst emerging-market performers this year. Demand eased since Turks withdrew some $2 billion in hard foreign cash from their banks during a March-May period in which a lockdown was imposed and the lira hit its last low, according to central bank banknote data. Since then, continued clampdowns have made withdrawals of foreign currencies even more difficult.

Meanwhile, locals expect another bout of selling in the lira. Indeed, analysts say that if Ankara cannot boost confidence in the currency, which has fallen almost 20% this year, import-heavy Turkey risks inflation and even a balance of payments crisis that will worsen fallout from the coronavirus crisis. It also guarantees even more weakness for the lira, and even more buying of gold.

Gold dealer Gunay Gunes talks to Reuters during an interview at the Grand Bazaar in Istanbul. Photo: Reuters.

Needless to say, with foreign investors now having only a small stake in Turkish assets after the government's authoritarian approach has spooked many of them away, it is critical for President Tayyip Erdogan to convince Turks and local businesses to stop turning to the perceived stability of dollars and gold. One look at the chart above suggest that's not working.

Finance Minister Berat Albayrak - who just happens to be Erdogan’s son-in-law - said on Wednesday the lira’s competitiveness is more important than exchange rate volatility. The central bank has effectively borrowed on local dollar liquidity to fuel its foreign exchange market interventions, which are meant to stabilize the lira, according to data and the calculations of traders and economists.

Through Turkish state banks, which together are "short" foreign exchange by $12 billion, the central bank has sold more than $110 billion since last year, Reuters data show. In turn, the bank’s gross FX buffer has fallen by nearly half this year to below $47 billion, its lowest in 14 years.

While the CBRT has downplayed the plunge in reserves, saying the "fluctuate" in stressful periods with the Treasury chiming in to say say the bank intervenes at times to stabilize the currency, ratings agencies and investors say Ankara should take decisive steps such as an interest rate hike to rebuild reserves and restore confidence. Otherwise, rising current account deficits and a possible debt default could tarnish the country's formerly solid reputation for meeting foreign obligations.

And, as Reuters notes, these debt repayments are set to rise in October, but the local aren't waiting the 2 months to see how the current crisis plays out.

"Locals don’t want to keep Turkish lira, they’ve been dollarizing and buying gold. Turks have hardly ever done that historically," said Shamaila Khan, New York-based head of EM debt strategy at AllianceBernstein. "That is why you need proactive policies because if you get to that stage where locals are unwilling to keep their money in the bank then you’re heading to a balance of payments crisis. That’s when the alarm bells will start ringing."

To halt the bank runs, some banks imposed fees on withdrawals this week, while the central bank has curbed cheap credit channels it had opened to ease the coronavirus fallout. Yet while lira deposits now earn more than the 8.25% policy rate their real return is negative with inflation at 11.8%.

Perhaps Erdoganomics, whereby the president mandated to "fight" high inflation with lower rates in contravention of all norms and rules of economics, will ultimately end up destroying Turkey just as so many expected.

Or maybe not: traders say backdoor tightening needs to reach 11.25% to stabilize the lira, which has nearly halved in value since early 2018, sowing anxiety over diminished living standards in a country accustomed to free trade and travel; still Erdogan is firmly against higher rates claiming they slow down the economy, so instead the result has been currency destruction, because at the end of the day one can't simply "order" economic prosperity.

Meanwhile, Erdogan shows no sign of budging, and on Monday he said he hoped market rates would fall further "god willing."

But firms such as System Denim, which imports some materials and makes clothes for foreign companies like Zara and Diesel, are feeling the pinch from rising investment costs. Owner Seref Fayat said he recently converted his 4% euro-denominated loans to lira at 10%.

"No need to take on additional FX risk," he said. "Now I pay a higher rate, but at least I can see ahead."