Turkey’s central bank has $93 billion to defend a currency whose slide is accelerating after a surprise rate cut. The lira plunged to a two-year low of 1.743 per dollar after the central bank in Ankara reduced its benchmark to 5.75 percent yesterday, citing the risk of a recession imported from Europe. The bank unveiled steps to protect the lira, the worst performer among major currencies this year, including auctions to sell dollars “when needed.” That may be as early as today, said Ozgur Altug, an economist at BCG Partners. “In order to send the right message the bank will have to go as big as possible,” with an offer of at least $200 million, Altug said in a phone interview from Istanbul. “They’ve got the market so confused there are a lot of people who want to get rid of Turkey.” Governor Erdem Basci is seeking to shore up the lira as counterparts in Japan and Switzerland do the opposite, trying to stem currency gains amid a global rout that is driving investors toward the safest assets. Basci’s critics say it’s his policies that are leaving the currency vulnerable. He has kept borrowing costs at record lows this year even as Turkey’s economy surged on the back of a domestic credit boom, squeezing the interest- rate premium that attracts foreign cash to emerging markets. ‘Large Risks’ “The central bank is taking large risks by cutting interest rates in the current global environment,” Maarten-Jan Bakkum, an emerging markets strategist at ING Investment Management in the Hague, which oversees about $460 billion, said by e-mail. It “should be more worried about attracting capital in difficult global times than about the negative impact from the Euro zone crisis on Turkish growth.” More than $4.4 trillion has been wiped off equity market values worldwide since July 26, driving the MSCI All-Country World Index down more than 10 percent from this year’s high. The slump threatens to dry up the flows of foreign money that Turkey increasingly depends on to finance its current account deficit. The gap ballooned to $68.2 billion, or about 9 percent of economic output, in the 12 months through May. That makes Turkey vulnerable to swings in risk appetite and demands “a larger buffer of both private and official foreign-exchange reserves,” Moody’s Investor Services said on Aug. 3. Instead of adding to Turkey’s savings, Basci is set to start spending them. The central bank says that starting today, it will announce at 11 a.m. each day whether there’ll be a dollar auction. Potential Flight The bank also said today that it will release $930 million in liquidity by cutting the reserve requirement for banks’ foreign currency deposits, a measure that takes effect Aug. 19. At his disposal to combat a potential flight of investors from the lira, Basci has reserves equal to about 18 weeks of imports. That compares with about 22 weeks in Poland and 40 weeks in Thailand, according to Bloomberg data. The lira has fallen about 11 percent this year, meaning losses for anyone who bought into lira-denominated bonds whose yield peaked at 9.29 percent this year. The currency fell 2.5 percent yesterday, its biggest decline in 3 months. “Any local bond investment is now underwater in currency- adjusted terms, which is going to come as something of a surprise to those who chased the apparently attractive yields on offer earlier this year,” Michael Shaoul, chairman of Marketfield Asset Management, said in a note to clients. ‘Path of Growth’ The central bank has “signaled an intention to follow a path of growth at all costs that ignores the clear pressures already being brought to bear,” said Shaoul, whose $725 million Marketfield Fund returned 14 percent in 2010, beating 91 percent of peers. Basci predicts that inflation, currently 6.3 percent, will miss the year-end target of 5.5 percent, though he says it will slow toward target levels by 2013. Pressure on prices is declining as industrial output figures show the economy is slowing from the 11 percent annual growth it reported in the first quarter, the bank says. The central bank on July 25 halted dollar-purchase auctions and returned $590 million to banks by cutting reserve requirements. Basci said on July 28 that he has tools to prevent further lira weakness. The last time it used the dollar sales tool was in March and April 2009, when it sold $50 million a day. In June 2006, after a 16 percent slump in the lira the previous month, the bank spent $1 billion in two days of auctions plus $2.1 billion in direct purchases on the market to support the currency. ‘Middle Ground’ Prime Minister Recep Tayyip Erdogan, re-elected to a third term in office on June 12, said July 27 that there’s no need for concern over the value of the lira. The currency will naturally find a “middle ground,” he said. “The bank’s reserves might not look enormous, but there’s plenty of ammunition there as long as it’s used to manage an orderly depreciation, rather than defend a particular level,” said Inan Demir, chief economist at Finansbank AS in Istanbul. Still, sales may start immediately because “there’s already pressure on the market.” To contact the reporters on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net; Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net. To contact the editor responsible for this story: Louis Meixler at lmeixler@bloomberg.net.

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