CBRT should hike the repo rate in the vicinity of 30% from 17.75% now - TD Securities

"Turkey's financial situation is the direst it has been in years. Since the end of July, the lira has weakened by a staggering 10% against the dollar," TD Securities analysts point out.

Key quotes

"Without rapid intervention, Turkey will head into a BoP crisis with unforeseeable but significant consequences."

"Summer-thin liquidity helps magnify the reaction. Turkey's problems, however, remain mostly idiosyncratic. Amongst them: 1) pro-growth policies that neglect the inflation target; 2) a wide current account deficit and unstable sources of coverage; 3) modest liquidity buffers, and 4) a negative and deteriorating political backdrop."

"We think the CBRT has to act swiftly (even tonight) to short-circuit the adverse market dynamic. The CBRT should hike the repo rate in the vicinity of 30% from 17.75% now, with the first hike of no less than 300bps, and squeeze the front-end of the curve (1-6m) to 40-50%."

"Recourse to an IMF program or the imposition of capital controls are possible options, but unlikely at this stage as the political and economic cost these measures would bear is higher than simply tightening monetary policy, albeit with shockingly strong moves."