As Lira Crisis Raged, Turkish Banks Were Cashing In Their Gold

(Bloomberg) -- Commercial lenders in Turkey have pulled as much as $4.5 billion worth of gold reserves since mid-June in an effort to avert a liquidity crisis as the lira plunged.

Weekly holdings reported by the Central Bank of Turkey fell by almost a fifth since June 15 to 15.5 million ounces with the lion’s share -- $3.3 billion -- of the exodus sparked by the monetary authority’s Aug. 13 move to lower reserve requirements.

“The commercial banks were probably switching to more liquid assets, given what has happened to the lira,” Jason Tuvey, a senior emerging markets economist at Capital Economics in London said by phone on Friday. “There’s been concern at the commercial banks over their external debt burden, which has been reflected in the rising bank bond yields.”

Turkish lenders are allowed to meet reserve requirements with bullion deposits, unlike in most other countries.

Turkey is one of the 20 largest sovereign owners of the precious metal and boasts the fifth-biggest consumer demand in the world, according to 2017 data from the World Gold Council. It refines scrap gold into jewelry sold all over the Middle East.

The central bank cut the reserve requirements for banks by 4 percentage points for foreign exchange liabilities over one, two and three years, and by 2.5 percentage points over other maturities. This equated to $3 billion worth of dollar-equivalent gold liquidity, it said in a statement.

“The most drastic drop appeared in August when the lira gold crisis was at its peak,” Cagdas Kuckemiroglu, Turkey-based consultant for Metals Focus said by email. “Whether the sell-off continues will depend on how the market reacts to yesterday’s interest rate change.”

Policy makers increased the one-week repo rate by 625 basis points on Thursday to 24 percent, more than economists expected. The hike helped to arrest an almost 40-percent swoon in the lira this year.

Of the $118 billion in short-term debts due by September 2019, 15 percent accrues to publicly owned banks, and 44 percent to private financial institutions, according to Nora Neuteboom, an ABN Amro Group NV economist who specializes in Turkey.

The banks borrow on international markets in hard currencies, hedging dollar liabilities with gold deposits rather than the volatile lira, even though their loan assets are denominated in lira.

“But, of course, you can’t repay your debt in gold, so they’re probably selling to shore up finances for when their debt becomes due,” Neuteboom said.

--With assistance from Lorcan Roche Kelly.

To contact the reporters on this story: Rupert Rowling in London at rrowling@bloomberg.net;Fercan Yalinkilic in Istanbul at fyalinkilic@bloomberg.net;Eddie van der Walt in London at evanderwalt@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Cecile Gutscher, Sid Verma

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