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Turkey Said to Lean on Local Banks to Support Its Debt Auctions

Turkey Said to Lean on Local Banks to Support Its Debt Auctions

(Bloomberg) -- Turkey is leaning on local banks to buy more government bonds in debt auctions.

In the latest sign of their increasingly interventionist approach to policy making, Turkish authorities asked some of the nation’s primary dealers to support the government’s borrowing drive last week, according to three people with direct knowledge of the matter.

The banks were asked to bid for more bonds than they needed in their roles as market makers, the people said, requesting anonymity as the matter is not public. The move comes amid a fiscal splurge that has widened Turkey’s budget deficit, pushed borrowing costs toward the highest level in a decade and deepened the lira’s depreciation this year.

Investors say instead of reining in spending to help steady markets, the government has been trying to impact market rates directly and often by turning to lenders. Last year, it began curtailing the supply of long-dated local-currency bonds even as its borrowing needs ballooned, killing off liquidity in the market for benchmark securities. The government also piled pressure on state banks to extend cheap loans, hurting their profits.

Turkey’s annualized budget deficit widened past a record 100 billion liras ($16.5 billion) in April and the government’s immediate borrowing needs are growing. The Treasury is scheduled to borrow 11 billion liras in June and 19.5 billion in July, the most since February.

Turkey’s Treasury and Finance Ministry had no immediate comment.

Higher Yields

While it’s not entirely uncommon for the Treasury to request that banks take part in government bond auctions, this time the demand came directly from a senior government official, two of the people said. The government made similar requests earlier this year, one of the people said.

It’s unclear if the banks heeded the request, but the auction results provide some clues: the average simple yield offered for two-year government bonds sold on May 14 was 24.2%, almost 150 basis points below the previous day’s close. The average yield accepted at the auction was 23.9%, and in the secondary market it has since climbed to 24.6%.

The yield on two-year local-currency debt surged more than 650 basis points this year, touching an eight-month high of 26.2% last week.

At 14.6 billion liras, total borrowing for May was slightly below a government target of 15.9 billion liras, data from the Treasury show. The Treasury sold 6.8 billion liras to lenders in four separate competitive bond auctions on May 13 and May 14 and another 7.8 billion liras through non-competitive sales.

Foreign Exodus

Compounding the stress in the local-currency bond market is political uncertainty that is mounting ahead of a rerun of municipal elections in Istanbul in June and a brewing geopolitical spat with the U.S. over Turkey’s planned purchase of a Russian missile defense system.

Overseas investors sold more than $2.6 billion of local-currency government bonds this year, central bank data shows, bringing their share in the market to record low of 13%. At its peak in 2013, that share stood at 28%. Outflows accelerated after the government orchestrated a liquidity squeeze in the offshore lira market in March to stem a rout in the currency, forcing some foreign investors to offload their holdings.

--With assistance from Firat Kozok.

To contact the reporters on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net;Asli Kandemir in Istanbul at akandemir@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Dana El Baltaji at delbaltaji@bloomberg.net, ;Stefania Bianchi at sbianchi10@bloomberg.net, Vidya Root, Paul Sillitoe

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