Once more, things go full circle in Turkey. Once more a whole slew of articles—telling us how this time, maybe, just maybe this time, the Erdogan administration will swallow the bitter monetary medicine that the Turkish economy so badly needs—is consigned to the trash bin as Turkey’s nearly all powerful leader goes back to his screwy habits.

Yes, here we are again. Back at the juncture Turkey is getting to know so well, wondering whether the dam will break. This time round, it is widely known that the country’s FX reserves are perilously low. A popular bet is on how long it will be before the authorities run out of firepower to defend the lira.

Turkish fortune-tellers say “Up to three terms” after reading your coffee grains. And, whether by “terms” they mean weeks or months is up to you. Perhaps, if they were looking at the fate of the lira, they might be referring to days.

It’s no exaggeration to say that with the Erdogan regime one cannot even be sure what move will come within the next few seconds. Thus, it is hard to come up with predictions. However, it is fair to say that if officials inured to economic pain plan to hold the lira, come what may with the angry exodus of foreign investors, the term, at most, could be set at a few months.

The Erdogan ruling apparatus seems dishevelled.

The main man, President Recep Tayyip Erdogan, appears to have lost his bearings ahead of the ruling AKP party congress scheduled for March 24.

The latest economic mayhem has still not filtered through to many ordinary Turks. To the millions who do not care to follow the financial markets, 7.90 to the dollar is not much different than 7.10. Over 8.00, though, starts to ring alarm bells and queues will appear if the all-time weak rate of 8.59 is breached.

On Tuesday March 23, the second day of the lira market frenzy, the overnight swap rate in London for the Turkish currency went as high as 9,001%, according to Bloomberg.

The move in the lira overnight swap rate evoked echoes of 2019, when the rate rocketed to more than 1,000% as Turkish banks withheld liquidity from London markets as the currency came under pressure before the local elections, Reuters noted.

Turkish banks were already subject to certain London transaction limits and 2.5% of a lender’s equity is the present limit for swaps to provide lira at spot to London in exchange for FX, while 10% of a bank’s equity is the limit for contrary swaps obtaining lira from London in exchange for FX.

On March 24, newly appointed central bank governor Sahap Kavcioglu will meet with local bankers who did not take part in his March 21 gathering of bankers, which only involved the heads of banks in the Banks Association of Turkey’s (TBB’s) general assembly.

“Foreign investors are trying to liquidate long TRY (lira) positions in a rush this week,” Onur Ilgen of MUFG Bank Turkey told Reuters.

“This resulted in a significant liquidity squeeze in the offshore lira swap market, driven from tenor mismatch for outstanding TRY placements as foreigners lending longer-term TRY via the forward market have an immediate need for TRY cash to unwind long spot positions on the currency,” he added.

“Killing people already invested in lira assets”

“I get why they are pushing forwards higher—making it expensive to short the lira. They have done that before. But it’s killing people already invested in Turkish lira assets as it makes it so expensive to hedge and reduce exposure. And remember that people will be pushed to leave by risk departments and this all just kills them,” Timothy Ash of Bluebay Asset Management wrote in a note to investors.

When ‘Londoners’ cannot access lira, they turn to selling their lira assets.

On the domestic interbank FX market, Turkish government-run lenders were working to keep the USD/TRY rate below the 8.00-line but volatility remained high.

On the Borsa Istanbul front, the ‘invisible hand’ was holding up the equities market via non-banking stocks, after the stock exchange saw its second 10% descent within two days on the morning of March 23, but by the end of the trading day the index finished flat. No FX is required here.

However, on the derivatives market (VIOP) and in banking stocks the picture was still bloody. It seems that the government has totally sacrificed the banking industry.

As another ‘non’-capital control, Borsa Istanbul introduced a one-day up-tick rule on short sales. Only BIST-50 index components were available for short sales.

Five-year credit default swaps (CDS) on Turkey were heading to 500.