Turkey’s central bank has spent a record $12 billion defending the lira, after the detention of Istanbul’s mayor, Ekrem İmamoğlu, a prominent political rival to President Recep Tayyip Erdoğan, sent shockwaves through the country’s markets. The intervention, which amounted to $11.5 billion on Wednesday, marked the largest currency defense in the country’s history, nearly four times bigger than any previous effort, as officials scrambled to prevent further collapse of the national currency.
The dramatic move came after the lira plunged by as much as 11 percent against the US dollar, hitting an all-time low, in the wake of İmamoğlu’s arrest. This sparked widespread panic among investors, leading to a mass exit from Turkey’s financial markets. According to sources familiar with the matter and calculations by Bürümcekçi Research and Consultancy, the central bank’s intervention was a desperate attempt to regain control of a market that had lost confidence in the wake of the political crisis.
One Turkish banker described the situation as officials “losing control” of the market early on Wednesday, adding that the events had “left a scar” on investor confidence. JPMorgan Chase, a key player in emerging markets finance, also noted that “lira liquidity was impaired amid large outflows” following the detention. The central bank, however, declined to comment on the specifics of the intervention.
Analysts suggest that the central bank may have continued its interventions through Thursday and Friday, alongside other measures taken by policymakers to stabilize the currency. One such action was an emergency central bank meeting on Thursday, which saw a hike in the key overnight interest rate. The move aimed to encourage local savers to hold their funds in lira accounts rather than fleeing to dollars in a bid to protect their assets from the lira’s collapse.
While the actions helped slow the lira’s decline, the currency remained down 3 percent for the week. The political turbulence also spread to the Istanbul stock market, with the Bist 100 index plunging almost 8 percent on Friday, marking its worst week since 2008.
Ekrem İmamoğlu, who has become the primary challenger to Erdoğan’s long-standing rule, was poised to run as a presidential candidate for the opposition Republican People’s Party (CHP). His arrest has sparked widespread unrest, with the CHP calling for additional protests. Erdoğan, however, dismissed the protests as “street terrorism,” further intensifying the political divide.
The political upheaval poses a significant setback to Turkey’s ambitious economic reform program, which was introduced after Erdoğan’s re-election in 2023. The program, led by Mehmet Şimşek, a former Merrill Lynch banker, aimed to curb Turkey’s persistent inflation crisis and restore investor confidence. The reforms included drastic interest rate hikes—reversing Erdoğan’s previous stance of keeping rates low despite runaway inflation—along with tax increases. The program had shown early signs of success, with inflation dropping to 39 percent from over 85 percent in late 2022.
Turkey’s foreign currency reserves had also been rebuilt over the past year, rising to almost $100 billion in mid-2023 from about $57 billion earlier in the year, prior to this week’s interventions. However, long-term investors have remained wary of Turkey’s economic outlook, concerned that Erdoğan could revert to his unorthodox economic policies, which have historically undermined confidence in the country’s financial stability.
Despite this uncertainty, hedge funds and other investors have capitalized on high interest rates, placing approximately $35 billion in so-called “carry trades,” which involve borrowing in low-yielding currencies to invest in higher-yielding ones, according to JPMorgan.
