Updated from 12:40 p.m. ET
Turkish overnight interest rates soared to 6,100% as the central bank bolstered the lira in a bid to maintain control over inflation, while concerns about the stability of the government intensified.
Overnight rates, which were about 40% last week, skyrocketed after the central bank restricted the supply of the local currency to force banks to sell dollars for the liras they need to meet daily commitments. Analysts believe that such a defense of the currency could result in the collapse of some commercial banks in Turkey and spark a contagion reminiscent of the Russian debt crisis of 1998.
There were rumors in the treasury market that the U.S.
Federal Reserve Board of Governors
held an emergency meeting today to discuss possible rate cuts in response to the rate hikes in Turkey. But Tony Crescenzi, chief bond market strategist at
believes the rumors are false, given that the Fed's board of governors had a regular meeting yesterday when the problems in Turkey were already evident.
Concerns that Turkey's three-party governing coalition might collapse were stoked Monday after Prime Minister Bulent Ecevit walked out of a National Security Council meeting, saying accusations made by President Ahmet Necdet Sezer were reason for a "serious crisis'' in the government, according to published reports.
Turkey's central bank governor and other economic officials reportedly went into a meeting with government leaders earlier today. Turkey, which had inflation of almost 70% a year ago, needs to keep the lira from falling more than 0.9% each month to meet inflation targets agreed upon with the
International Monetary Fund
. During the country's last economic crisis three months ago, investors withdrew more than $7 billion from Turkey before the IMF intervened with additional loans for its struggling economic program.
The International Monetary Fund told
that it was in "continuous talks" with Turkish authorities but that the situation "is in the hands of the Turkish government."