"Turkey Is Rewriting The Crisis Textbook": El-Erian Says It's Time To Cut Exposure

The Lira was holding on to its rebound gains after 6,100 investors reportedly listened in to Turkish FimMin's conference call. But then Mohamed El-Erian, chief economic adviser to Allianz SE, spoiled the party by telling Bloomberg TV that it's time to reduce Turkish exposure as restrictions on shorting the lira only offer short-term relief.

El-Erian specifically noted:

"Turkey is trying to rewrite the crisis management chapter in the playbook for emerging markets. It’s trying to go without interest rate hikes. It’s trying to do it without the IMF. That’s hard. It’s not impossible, but it’s hard."

Additionally, El-Erian warned that the $15 billion pledge from Qatar "not enough," adding that the lira is "as uncertain as starting quarterback spot on New York Jets."

"We are in the midst of a contagion phase that’s impacting both strong and vulnerable economies."

"If I were back in the game, I would say this is great. The market isn’t distinguishing enough between strong and weak names."

El-Erian concludes by telling investors to look for three things: balance sheet strength, agility (policy and corporate side) and places with no immediate funding needs.

This seemed to spark an immediate reversal in the lira...admittedly modest for now.

El-Erian is not alone:

Julian Rimmer, a London-based trader at Investec Bank, said "I definitely wasn’t impressed," in response to Turkish Finance Minister Berat Albayrak’s conference call with investors on Thursday.

“The only modicum of encouragement was that he expressed commitment to cutting spending and said they’d already started that. Whether they’re able to implement it fully is another matter.”

“Unfortunately, he still seems to be claiming that this crisis is purely caused by a change in investor sentiment because of some geopolitical events. But this dispute with America only began recently. And the Turkish lira has lost a huge amount of its value in the last five years."

“He was asked a very straightforward question on monetary policy. It was an easy time to say that they would raise rates if necessary. He ducked the question."

“I’ve been underweight Turkey for as long as I can remember. And I see no catalyst to change my stance.”

Rimmer concluded:

There’s denial and a refusal to accept market realities and the fact they will have to hike rates and/or cut spending very sharply. There’s no way of getting round it. It seems like they think they can."

Additionally, Per Hammarlund, chief emerging-market strategist at SEB in Stockholm, wrote in a note today that the Turkish lira could fall to 8 or more by the end of the year unless the government shifts course on policies including interest rates. Bloomberg reports that Hammarlund thinks USDTRY could reach 5.50 in coming days, given agreement with Qatar on funding, but rally won’t last:

"Turkey may be able to avoid a full-blown balance of payments and banking crisis for another 3–6 months by tinkering with reserve requirements and other temporary regulatory changes," Hammarlund writes.

"But the day when the authorities will be forced to change course is drawing closer"

Some context for the recent bounce seems to confirm the warnings that this is far from over...

The credit market - not subject to same technical squeeze that FX is - is not buying the bounce.