Turkey Boosts Lira Defenses as Currency Nears Record Low

(Bloomberg) --

Turkish policy makers are ramping up their defense of the lira, which is edging closer to a record low despite concerted efforts to keep a lid on depreciation.

The central bank on Tuesday raised the amount of foreign-currency swaps private lenders can hold on their books, people familiar with the decision said. That could be a sign the monetary authority is preparing to increase its hard-currency buffer by borrowing more from domestic lenders, as state banks continue to intervene on the spot market to prevent the lira weakening.

The currency fell for a fifth day, sliding as much as 1.7% to 7.1951 per dollar as Treasury and Finance Minister Berat Albayrak held a conference call with global investors. The lira has weakened more than 17% this year. Its all-time low, set in 2018, is 7.2362.

On Monday, the banking authority moved to further restrict foreign traders’ access to lira liquidity in an apparent bid to deter short selling. Some local banks were asked not to offer any liras to clients abroad, according to two people with knowledge of the matter.

The regulator confirmed in a statement late Tuesday that it was limiting banks’ repo transactions, deposits, loans and other placements abroad in lira to 0.5% of their equity. The measures will stand until the coronavirus outbreak ends, it said.

Lira Squeeze

The shortage of liras to lend to foreign investors has periodically squeezed offshore funding rates, forcing traders betting against the currency, or hedging their exposure to Turkish assets, to exit their positions.

The lira has come under pressure amid monetary easing from the central bank. It’s lowered its main interest rate by more than 15 percentage points since July to 8.75%, taking it below the rate of inflation.

At the same time, Turkish authorities have sold dollars to slow the lira’s decline, while making it difficult for foreign investors to trade local assets. State banks sold around $1 billion of foreign currency on Wednesday, according to two people with knowledge of the matter. They sold about $500 million on Tuesday, the people said.

Turkey’s state banks don’t comment on interventions in the foreign-exchange market.

Floating Regime

Last week, central bank Governor Murat Uysal said Turkey isn’t defending any specific currency level and that it maintains a floating exchange-rate regime. In January, he said state banks have been carrying out transactions in line with regulatory limits and may continue to be active in the currency market.

Turkey’s gross reserves, including gold, have dropped by about $20 billion this year to $86.4 billion through April 24, the lowest level since October 2018. Net reserves -- which exclude some liabilities such as lenders’ required reserves -- are down more than $15 billion, to just over $25 billion.

When money borrowed from local lenders via swaps is stripped out from net reserves, they fall below zero, according to Bloomberg calculations.

©2020 Bloomberg L.P.