Turkish central bank faces severe reserve losses following Black Monday

Amid global financial turmoil, the Central Bank of the Republic of Türkiye (CBRT) is grappling with severe reserve losses, having sold $6.6 billion this week to stabilize the lira.

With losses expected to reach $6 billion by the weekend, the bank faces mounting pressure over its liquidity management and future financial stability.

What happened: The initial wave of sales was triggered by fears of a U.S. recession and a sell-off in carry trade positions. The resulting instability has led to further declines in Asian markets.

• The shockwaves from the U.S. non-farm payroll data, which fell short of expectations, intensified concerns about a potential recession. This uncertainty has contributed to increased market volatility in Türkiye and beyond.

Central bank reserve losses

• Recent sales: To maintain currency stability amid global financial turmoil, CBRT sold $6.6 billion from its reserves at the beginning of the week.
• Projected losses: Despite some recovery towards the weekend, weekly reserve losses are anticipated to reach $6 billion.

How does Black Monday affect Türkiye?

• Reserve trends: As of Thursday, the loss has been approximately $6.2 billion. The Central Bank’s efforts to prevent currency depreciation through reserve sales have not fully mitigated the effects.
• Citizen behavior: There is an increase in foreign currency conversion by citizens due to accelerated exits from Turkish Lira deposit accounts, indicating a lack of confidence in domestic currency stability.

Turkish central bank’s possible actions

• Forecasted losses: Journalist Erdal Saglam predicts that CBRT will face losses this year and possibly continue into 2025. He emphasizes the need for CBRT to acquire government bonds now to alleviate future liquidity issues.
• Fed interest rate cuts: Saglam forecasts that a potential Federal Reserve interest rate cut could increase fund flows into Türkiye, but also warns that CBRT’s approach to interest rates might exacerbate foreign currency demand.
• Government bonds: Saglam notes that while the Treasury provides bonds for public banks tied to the Wealth Fund, the Central Bank, which bears the brunt of losses from the KKM, has not issued bonds to cover its deficits.
• Liquidity management: The central bank faces challenges in managing liquidity, with concerns about its ability to handle future financial pressures without new solutions or treasury support.