Some Foreign Banks Are Said to Be Unable to Close Lira Swaps

(Bloomberg) -- Some foreign banks were unable to close lira swaps on Tuesday because they couldn’t find a Turkish counterparty to provide a sufficient amount of the currency, a senior official in Turkey said.

The country’s central bank had to extend operating hours during which foreign lenders can wire money to Turkey to allow them more time, but some lenders were still unable to close their positions, the official said.

Those foreign lenders that made a bet on a swift depreciation in the currency are now paying a price after precautions taken by the nation’s banking regulator and the central bank, another Turkish official said. The people asked not to be named in line with restrictions that ban civil servants from speaking to the media.

The government-backed measures, which resulted in an increase in the overnight cost of borrowing in liras, are meant to be temporary and Turkish policy makers remain fully committed to a freely-floating currency, the official said.

By engineering a squeeze on lira liquidity that made it near impossible for investors to move in and out easily, Turkish authorities averted a currency slide before municipal elections on March 31.

But warning signs are still flashing for other Turkish assets: credit-default swaps spiked as much 40 basis points to the highest since September and the cost of borrowing the lira overnight in the offshore market rocketed at one point to 1,200 percent.

While Turkey won’t abandon the principles of free markets, policy makers including the banking regulator will act to prevent any excessive depreciation in the currency even after the elections should the lira come under another attack, the second official said.

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