Is the music about to stop again?
Jeremy Irons’ character in the movie Margin Call, the CEO of an investment bank, reveals at one point why he “earns the big bucks”: “I'm here for one reason and one reason alone. I'm here to guess what the music might do a week, a month, a year from now. That's it. Nothing more.”
Since I don’t know any such hotshots, the Central Bank of Turkey will have to make do. At Tuesday’s rate-setting meeting, the Bank surprised everyone by lowering its overnight lending rate a full percentage point and not hiking lira reserve requirement ratios. You are more than welcome to read the details in my Economonitor blog, but in essence, the Bank changed its strategy because “there is a deceleration in capital inflows in the recent period.”
According to Gülay Elif Girgin of Ata Invest, the Bank went further at is biweekly meeting with economists on Wednesday, as “the officials stated that global uncertainty has increased and that might not be short-lived, even mentioning the possibility of seeing episode II after 2008-2009 period.”
While I think everyone gets this point, there seems to be a lot of confusion regarding the purpose of the Bank’s actions on Tuesday. I see all of those as the Bank’s preparations towards this impending storm. For example, the Bank increased the importance of its Reserve Option Mechanism and capped market rates at 7 percent by lowering its lending rate.
Not everyone is as gloomy. Credit rating agency Standard & Poor’s (S&P) upgraded Turkey Wednesday night. S&P was behind the curve in the sense that it was rating Turkey one and two notches lower than Moody’s and Fitch respectively. But even though they see the country as “fairly resilient to potential shifts in capital inflows”, they would have preferred to wait had they been as pessimistic.
On the other hand, the title of Deutsche strategist George Saravelos’ note on Thursday was “the day the music stopped”. Not only he feels negatively on the Cypriot policy response of capital controls and bank bail-in, he sees the political vacuum and weak growth in Europe as major risks. His colleagues were wondering a mere two weeks ago which countries were most “prone to overheating” because of excessive capital flows. Therefore, I don’t blame the Central Bank: They simply changed their minds when the facts changed, as John Maynard Keynes would have done.
After explaining his job at the bank, Jeremy Irons’ character goes on to say: “And standing here tonight, I'm afraid that I don't hear a thing. Just silence.” The Central Bank of Turkey is still hearing a few tunes, but I appreciate they are preparing as if the music would stop tomorrow, and not repeating their mistake in 2011, when they lowered the policy rate prematurely right before Europe turned sour.
After all, if you “get up and dance as long as the music is playing”, as Citi’s then-CEO Chuck Prince famously argued in 2007 shortly before the financial meltdown, you may find yourself without a seat when the music suddenly stops.
