Turkish Lira Falls to Record, Defying Efforts to Stem the Slide

(Bloomberg) -- Turkish regulators banned local banks from trading with Citigroup Inc., UBS Group AG and BNP Paribas after currency interventions and a stiff new raft of anti-manipulation rules failed to stem the Turkish lira’s slide to a record low.

President Recep Tayyip Erdogan has laid the blame for the lira’s decline on foreign speculators, and the tough new rules unveiled Thursday by the banking regulator run the risk of making the nation’s currency and swaps market even less liquid.

The lira erased its losses after authorities banned trading the currency with three of the world’s biggest banks, saying they had failed to meet their lira liabilities.

UBS declined to comment. A BNP representative was not immediately in a position to comment. Edwina Frawley-Gangahar, a spokeswoman for Citigroup in London, didn’t immediately comment.

The regulations -- which coincided with a state news report about a possible lawsuit against unnamed London firms -- may further deter short selling and limit media coverage of local markets.

“It looks like the authorities are overstepping the mark,” said Nigel Rendell, a senior analyst at Medley Global Advisors in London. “It’s a fine line between spreading ‘misleading and wrong information’ and having a view on the currency, rates, asset prices that the government may not agree with.”

The lira fell as much as 1.1% to 7.2690 per dollar on Thursday, pushing it past the level it reached during the country’s 2018 currency rout. It erased its decline and was trading 0.5% stronger at 7.1557 per dollar as of 5:53 p.m. in Istanbul.

To help slow the decline, state banks have flooded the market with dollars and the banking regulator has restricted foreign investors’ access to lira liquidity, making it difficult for them to bet against the currency. On Thursday, the watchdog expanded the definition of manipulative trades -- which may further deter short sellers.

According to the new regulations, bank trades that result in “misleading pricing” or keep asset prices at “abnormal or artificial” levels will now be considered manipulative.

London Firms

In a story published late Wednesday, the state-run Anadolu Agency said unidentified London-based financial institutions are facing possible legal action for taking “manipulative positions” against the country’s currency.

The crackdown comes amid a foreign exodus from Turkish assets that is piling pressure on the lira. Investors are concerned about the drop in central bank’s gross reserves, which have fallen by $20 billion since the start of the year to around $86 billion through the end of April.

The draw-down has coincided with interventions in the currency market by state lenders, fanning speculation that authorities are using their buffers to counter capital flight, even as they move to stimulate the economy with lower rates.

Rates, Reserves

“The key issue here is that many analysts and investors are negative on Turkey because of the actions of the central bank,” Medley’s Rendell said. Policy makers are “throwing caution to the wind and slashing interest rates aggressively and burning through borrowed FX reserves,” he said.

Turkey has more than $168 billion of foreign-currency debt coming due over the next 12 months and relies on external financing to roll these obligations. Yet foreign investors have pulled more than $8 billion out of local-currency bond and equity markets this year, with the outflows picking up pace amid the fallout of the coronavirus pandemic.

In an investor call on Wednesday, Treasury and Finance Minister Berat Albayrak downplayed the disquiet over Turkey’s cash pile, saying the central bank’s reserves are “sufficient,” and ruled out borrowing from the International Monetary Fund, according to people who attended the teleconference. Citigroup was one of the call’s organizers.

Swap Lines

Turkey has been lobbying the world’s biggest central banks to gain access to the type of currency swap lines that the U.S. Federal Reserve provided other emerging markets in March, easing their access to dollar liquidity.

Turkey Limits Banks’ Repo, Depot, Loans Funding in Lira Abroad

The latest restrictions -- which follow a gradual clampdown on how much lira foreign investors can access -- have contributed to a periodic shortage of the currency in offshore markets, squeezed funding rates, and forced traders betting against the currency, or hedging their exposure to Turkish assets, to exit their positions.

Turkey’s state banks don’t comment on their activities in the foreign-exchange market. Last week, central bank Governor Murat Uysal said that Turkey has no policy to defend any specific currency level and that it maintains a floating-rate regime.

©2020 Bloomberg L.P.