August 30, 2018 / 12:21 PM / 2 months ago

UPDATE 3-Deputy governor leaves Turkey's central bank, lira falls

(Adds Fitch, updates prices)

By Nevzat Devranoglu and Orhan Coskun

ANKARA, Aug 30 (Reuters) - Turkish central bank deputy governor and ratesetter Erkan Kilimci is leaving the bank, three sources familiar with the matter told Reuters on Thursday, two weeks before the bank's monetary policy committee meets to address a slump in the lira.

The currency, which hit a record low of 7.24 to the U.S. dollar two weeks ago, weakened on Thursday and touched 6.85 after news of Kilimci's departure. It was trading at 6.745 at 1410 GMT, down more than 4 percent on the day.

Kilimci is joining the board of the Development Bank of Turkey, according to a document the bank released. The central bank was not immediately available for comment on Thursday, a public holiday in Turkey.

"Kilimci had no disagreements with the central bank administration on any issues - including interest rates. His expertise will be employed at another public position, that's all," one senior source told Reuters.

The central bank has been under pressure from President Tayyip Erdogan not to increase interest rates, despite high inflation and the lira having depreciated more than 40 percent against the dollar this year.

The slump in the currency has driven up the cost of fuel and food and heightened concern about the risk to the country's banks and the broader economy.

Ratings agency Fitch, which downgraded 24 Turkish banks last month, said on Thursday the 25 percent fall in the lira since then had heightened risks and could lead to further rating cuts.

The underlying capital positions of the banks will weaken significantly due to the lira depreciation and declining asset quality, it said.

"Turkey faces a challenging financing environment given its large current account deficit, high foreign-currency debt and high inflation, exacerbated by deterioration in its economic policymaking credibility and its worsening political relationship with the U.S.," the ratings agency said.

Initially sparked by worries about Erdogan's influence on the central bank, Turkey's lira crisis has worsened over a rift with Washington over an American evangelical Christian pastor detained in Turkey on terrorism charges.

Facing economic pressure from the United States, Turkey has signalled a wish to improve strained ties with the European Union, which it still aspires to join despite disagreements.

However Ankara has found little help so far from abroad apart from Qatar, which pledged $15 billion in support.

The decline in the lira has driven up the cost of servicing dollar and euro loans that Turkish companies have built up for years, raising the possibility of ballooning bad debt for banks.

"Turkish banks are particularly exposed to refinancing risk, given their reliance on external funding," Fitch said. "Much of this is short-term, with $102 billion maturing in the next 12 months."

Fitch's warning came two days after Moody's downgraded its ratings on 20 Turkish financial institutions, citing the increased risk of a deterioration in funding. The operating environment is now worse than previously expected, it said.

The cost of insuring exposure to Turkish debt also jumped on Thursday and government dollar-denominated bonds extended falls across the curve.

Turkish five-year credit default swaps leapt 27 basis points (bps) from Wednesday's close to a two-week high of 535 bps, according to IHS Markit data. Turkey's sovereign dollar bonds also fell further. (Additional reporting by Claire Milhench in London Writing by Ece Toksabay; Editing by Dominic Evans/Mark Heinrich)

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