'The last straw': Why an irked Erdogan fired Turkey's central bank chief
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[March 31, 2021] By
Orhan Coskun and Jonathan Spicer
ANKARA (Reuters) - Politics drove Turkish
President Tayyip Erdogan's sacking of central bank chief Naci Agbal
after just four months in office, six people with knowledge of the
situation told Reuters, with one describing a big interest rate hike two
days earlier as simply "the last straw".
Agbal's shock dismissal by Erdogan, whose dislike of orthodox monetary
policy is well-known, has pushed Turkey to the cusp of another currency
crisis.
The decision surprised the governor himself, who according to two of the
sources worked late at the bank on Friday March 19, hours before he was
fired.
Senior government and central bank officials told Reuters Agbal's rapid
rise and fall reflected both his divergent vision for the economy and
the perceived threat he posed to Erdogan's son-in-law and former finance
minister Berat Albayrak.

The Presidential Palace and the central bank declined to comment on the
background to Agbal's departure, as did representatives for Agbal and
Albayrak.
Three of the sources, who spoke on condition of anonymity, said Erdogan
was irritated in February by Agbal's decision to review a costly policy
undertaken during Albayrak's tenure of selling dollars -- roughly $130
billion since 2019 -- to defend the lira.
"Was there discomfort regarding this? Yes, there was. It was one of the
influential issues in the presidential palace," the first source said.
Another person with direct knowledge of the review of FX sales said it
could have turned into an outside investigation had Agbal remained at
the bank.
Word of the potentially sensitive review reached Erdogan around the time
he was rallying public support for Albayrak, fuelling speculation that
his son-in-law was seeking a return to government after having quit in
November, a day after Agbal's appointment.
Albayrak and Agbal are seen as representing two key factions of the AK
Party (AKP), which has ruled Turkey for two decades under what analysts
describe as an increasingly authoritative and impulsive Erdogan.
'FIRST SHADOW'
One of the sources said "the first shadow fell over" Agbal on Feb. 24
when the bank made an apparently routine adjustment to reserve
requirements that was interpreted by Erdogan as a veiled interest rate
hike.
The same day, the president told AKP members that FX reserves at the
central bank had been reduced on Albayrak's watch to help the economy
through the pandemic last year.
The $130 billion in sales by state banks were backed by central bank
swaps, and they cut net FX reserves -- a country's buffer against
financial crisis -- by about 75%.
Even as several top government and party officials lined up to publicly
defend Albayrak from opposition criticism, Agbal -- himself a former
finance minister -- did not comment on his legacy and promised to
rebuild the reserves.
"Agbal was not happy that his job was being overshadowed by the previous
policy of spending FX reserves," said a person close to the bank.
During Agbal's short tenure, the lira first rallied 24% from a record
low before beginning to slide when Erdogan began defending Albayrak's
legacy. It jumped nearly 4% after Agbal hiked rates by 2 percentage
points on March 18 before plunging 13% when he was fired two days later,
returning nearly to where it began.

(Graphic: The lira's volatile March -
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gfx/mkt/yxmvjwdrkpr/
Turkey%20lira%20in%20March.PNG)
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Turkey's Central Bank Governor Naci Agbal poses during an interview
with Reuters in his office in Istanbul, Turkey, February 4, 2021.
Picture taken February 4, 2021. REUTERS/Umit Bektas/File Photo

Cemil Ertem, Erdogan's chief economy advisor, said Turkey will not adopt capital
controls to support the lira, adding "the free market economy will be applied
without compromise" despite the leadership overhaul.
Agbal had won praise from foreign investors who found his approach to monetary
policy reassuring after years of worry about the central bank's credibility --
now in tatters again after he became the third governor to be ousted in two
years.
Erdogan, who also abruptly fired the last two governors in part over policy
differences, had promised when Agbal was appointed to kick-start economic
reforms.
NEGATIVE FEEDBACK
As Agbal's successor, Erdogan named Sahap Kavcioglu, a former banker and AKP
lawmaker who pledged to keep policy tight but has previously espoused the
unorthodox view shared by the president that high interest rates cause
inflation.
Some investors now say they will avoid Turkey as long as Erdogan is leader.
Ratings agencies have warned of downgrades while stocks have suffered their
worst selloff since the 2008 global financial crisis.
"Erdogan, and the Turkish conservative circle, feel that a tight monetary policy
goes counter to their interests," said Patrick Esteruelas, research head at Emso
Asset Management in New York.
(Graphic: The lira's long descent -
https://fingfx.thomsonreuters.com/
gfx/mkt/ygdvzglqbpw/Lira%20timeline%20March%2030.PNG)
In March, with inflation above 15% and the lira sliding amid a global bond
market rout, markets were betting on a 1 percentage point rate rise to 18%.
Faced with what analysts called a credibility test, Agbal -- who had already
hiked rates from 10.25% -- decided to go further, to 19%, to reinforce his
inflation-fighting rhetoric.

Before that, as usual, he informed Erdogan's office of the policy decision. Two
of the sources with knowledge of the bank's operations said there was no
response.
"There was no negative feedback," said the second source. "The dismissal
seriously really surprised everybody."
The first source said the Palace did not officially inform Agbal he was being
dismissed until very late on Friday, March 19. Just after midnight, Erdogan's
order was published.
Minutes after financial markets reopened on March 22, the lira had lost 15% of
its value.
Since then, Erdogan has also dismissed a bank deputy governor, and a party
leader has said he plans a cabinet shuffle in which analysts say Albayrak could
resurface. The government has not commented on a possible return of the
minister.
Soner Cagaptay, a director at the Washington Institute for Near East Policy,
said "palace politics" and rivalries played a role in Erdogan's recent
decisions, and Agbal's sacking could pave the way to a comeback by Albayrak.
"Erdogan's decisions are increasingly undermined by clique politics," he said.
(Additional reporting by Dominic Evans in Istanbul, Rodrigo Campos in New York
and Karin Strohecker in London; Writing by Jonathan Spicer; Editing by Catherine
Evans)
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