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Few Turkish financiers expected to defend Murat Cetinkaya, the former governor of the Turkish central bank, whose three years in power have often been marked by an erratic and unorthodox policy.
But his dismissal of President Recep Tayyip Erdogan over the weekend after a clash on the pace of interest rate cuts sparked indignant shouts.
"Removing the governor from the central bank in this way will be a blow to his institutional structure, his abilities and his independence," Ibrahim Turhan, former deputy governor of the central bank, wrote on Twitter.
The departure of Mr. Cetinkaya means that the new governor, his former MP Murat Uysal, risks being considered as indebted to the president. Faik Oztrak, a former senior Treasury official and member of the main opposition Turkish party, warned that the central bank had become "a prisoner of the presidential palace".
Mr. Cetinkaya's dismissal has heightened investors' deep concerns about Erdogan's dominance in all areas of government policy, including economic management.
Some now fear that if the new governor is pressured to aggressively cut rates, Turkey may find itself facing the currency crisis of last summer, which has swept the value of the lira by 30%. Turkish in 2018, caused an outbreak of inflation and triggered a recession. Analysts say it would be a lot tougher a second time, especially for Turkish companies struggling with foreign currency debt and their lenders.
"If you experience another exchange rate shock when the economy is already in recession, your ability to pay off your debt will be seriously reduced," said Selva Demiralp, professor of economics at Koc University in Istanbul. "We have not yet solved the first crisis … Another blow will only make things worse."
When Mr. Cetinkaya was appointed governor three years ago, he was widely perceived as a lackey of Berat Albayrak, the powerful son-in-law of Erdogan, who last year became Minister of the Treasury and Finance.
Under the shots of Erdogan – a notorious opponent of high interest rates – he was criticized by investors for not reacting quickly enough to lower the slides of the lira.
When the currency plunged last August, the bank waited six weeks before raising its key rate to 24%.
Investors were alarmed by other unorthodox tactics, including the bank's efforts to hide an erosion of its currency reserves, but congratulated Cetinkaya for keeping the key rate unchanged since September. Inflation fell to 15.7% last month, while the large current account deficit has narrowed considerably.
Yet behind the scenes, tensions mounted. The governor of the central bank is increasingly bumped into Mr Albayrak, according to several people close to the case. The finance minister acted as the president 's emissary, whom Mr. Cetinkaya had not seen in private for nearly a year before his dismissal.
Mr Cetinkaya irritated the finance minister by refusing to cut rates at the last meeting of the Monetary Policy Committee in June. They again discussed plans for the next meeting at the end of July when Mr Cetinkaya would be willing to lower the rates – but not as much as Mr Albayrak wanted. Last month, Erdogan warned that high rates "were hurting" Turkey and promised that a "definitive solution" would be found soon.
Less than three weeks later, Mr. Cetinkaya – who had refused to resign – had been fired. Legal experts said the dismissal, by presidential decree, was illegal.
A spokesman for the Ministry of Finance did not respond to a request for comment. However, Erdogan virtually upheld the rate dispute at a meeting of ruling party deputies on Saturday, according to the Turkish Hurriyet newspaper.
It is unclear how the new governor will get away with it. A Turkish financier has described the former head of the public bank Halkbank as "smart" but worried about his ability to stand up to the government. Another said that his last name – which means "soft" or "malleable" in Turkish – was a fair representation of his character. He would have advocated a rate cut at the last meeting of the Monetary Policy Committee.
Investors are worried that Uysal will face strong pressure to sharply cut rates at the next MPC meeting on July 25 – a move that they say will only worsen serious economic problems. "This change will result in a much weaker currency," said Abbas Ameli-Renani, portfolio manager at Amundi, badet manager.
Paul McNamara, fund manager at GAM, said he was worried that Erdogan would be determined to "grow at any cost". "If they try to short-circuit the recession by trying to put more lending into an economy in crisis, that's the scenario in which things can go wrong in Turkey."
The turmoil in the central bank comes as Turkey prepares to take delivery of a Russian S-400 air defense system that may trigger US sanctions and scare financial markets.
Durmus Yilmaz, a former central bank governor and vice chairman of the opposition IYI party, said Uysal had a "very difficult" road ahead. He said: "If he wants to behave differently [from the government’s wishes]his result will not be different from that of Mr. Cetinkaya. "
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