Turkey Redraws Currency Defenses With Lira Hitting a Record Low
Turkey Redraws Currency Defenses With Lira Hitting a Record Low
(Bloomberg) -- Turkey stepped back from currency interventions and moved to relax some of the restrictions that tethered the lira for months, allowing it to tumble to a record against the dollar.
State banks withdrew support for the lira at specific levels against the U.S currency even as it dropped to an all-time low, and were largely absent from the market on Thursday, according to people familiar with the matter. Authorities will also exempt foreign banks from some restrictions on swapping foreign exchange for liras after easing access for international development institutions.
The new tack offers the first clear signs that Turkey is looking to undo parts of its two central economic policies of the past year: currency interventions designed to stem the lira’s depreciation and severe restrictions on capital movement that made it difficult for foreign investors to trade the nation’s assets.
The approach drained the central bank’s reserves and compounded a flight of money from Turkey.
But as the lira buckled on Thursday, state banks appeared to let the currency trade more freely after spending months trying to prop it up by flooding the market with dollars. Goldman Sachs Group Inc. economists estimate that interventions reached around $65 billion in the first half of the year, compared with a total of $40 billion for all of 2019.
In response to market turmoil, the central bank issued a statement that said it plans to roll back the liquidity measures taken to support the economy during the global pandemic while making no reference to interest rates.
‘More Tolerance’
“There is more tolerance for currency volatility than there is for a drastic measure like an emergency rate hike,” said Phoenix Kalen, a strategist at Societe Generale SA in London.
The lira fell 3.4% to 7.2840 versus the U.S. currency as of 5:48 p.m. in Istanbul, leading declines in emerging markets. The cost of insuring the nation’s bonds against default climbed to the highest in three months, while the main stock gauge lost more than 4%, making it the worst performer among developing-nation peers.
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“The lira’s plunge isn’t surprising -- Turkey has consistently ranked as one of the most vulnerable emerging markets on our scorecard. What’s next? Either further bleeding of the country’s foreign assets or an interest rate hike. With reserves rapidly dwindling, the likelihood of the second option is rising.” Click here to view the piece. |
Turkey’s banking regulator published a decision that will allow international banks to conduct lira swaps, suggesting that foreign investors will once again be able to borrow the currency from local lenders. The hope is that they can begin to finance their investments in the country and hedge their exposure without the risk of facing sudden liquidity shortages.
The cost of overnight funding spiked to over 1,000% earlier this week, making it prohibitively expensive for foreign investors to borrow the currency and forcing many to dump their bond and equity holdings.
Facing a worsening outlook, the central bank has already paused monetary easing and left rates on hold for two months. In the view of analysts from Goldman Sachs and Oxford Economics, rate increases may be warranted soon. Others are less bearish, citing a shortage of liquidity in the offshore money-market engineered by authorities.
The option of increasing rates would likely draw stiff opposition from President Recep Tayyip Erdogan, who advocates an unorthodox theory that high borrowing costs cause rather than curb inflation. He fired central bank Governor Murat Uysal’s predecessor a year ago for not easing policy.
The central bank has delivered 1,575 basis points of interest-rate cuts in nine consecutive steps since July 2019, driving borrowing costs adjusted for inflation below zero.
Turkey was facing a “dangerous combination” of trying to avoid a devaluation with insufficient reserves and perception that its currency is overvalued, according to Eric Baurmeister, head of emerging-market debt at Morgan Stanley Investment Management in New York, which has $665 billion under management.
“If panic starts and the market starts selling off, you end up devaluing in an uncontrollable manner, you have a currency meltdown and you have no reserves and you find yourself with a real debt-sustainability problem,” he said.
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