Turkish Lira's Borrowing Cost Shoots Up on Offshore Markets
By Caitlin Ostroff and Anna Isaac
The cost of borrowing Turkish lira spiked on Tuesday,
highlighting how the currency, once a darling of emerging-market
investors, has lost appeal.
The interest rate attached to so-called swap transactions, which
allow one party to obtain lira for a short period in exchange for
dollars, reached 1,000% in annualized terms on offshore markets,
according to analysts and traders.
The exorbitant rate wasn't a reflection of high demand for the
lira, analysts said, but rather of how the Turkish currency's
offshore market has become dysfunctional.
The spike, which began overnight, was likely the result of a
bank or investor trying to buy lira after having shorted it, or bet
on its weakening, and being unable to buy the currency back, said
Timothy Ash, senior sovereign strategist covering emerging markets
at BlueBay Asset Management.
The lack of liquidity, or ease with which traders can buy or
sell, stems from Turkish authorities making it more difficult for
local banks to provide lira to foreign banks. This has decreased
access to the lira, pushing up borrowing rates to obtain it.
"They've limited that market massively," Mr. Ash said. "The
offshore market is broken."
The overnight spike heightened investor nervousness over the
lira's future trajectory. Investors are worried that Turkey's
central bank, which sold billions of dollars in recent months in a
bid to prop up the lira, is running low on options to curb
volatility in its currency. The central bank used its own reserves,
but also dollars borrowed from domestic banks, to buy the lira. As
a result, it owes more foreign currency to the banks than it
currently has in its coffers.
The central bank has said it has adequate reserves.
A textbook lever to support the lira, which has lost more than
14% against the dollar so far this year, would be to increase the
central bank's benchmark lending rate. But Turkey's President Recep
Tayyip Erdogan has instructed the country's financial authorities
to keep interest rates low and boost lending to households and
businesses to fuel economic growth.
At home, analysts said that the central bank could continue to
tap into the pool of dollars credited on the books of Turkish
lenders, which stands at about $230 billion, as long as the banks
don't express an immediate need for them.
Abroad, however, they said that the shrinking offshore lira
market would soon create problems for Turkey itself. Initially,
Turkish authorities sought to make it harder for investors and
banks to bet on the lira weakening, helping limit the lira's slide
against the dollar this year. But the restrictions have also
hindered the activities of foreign portfolio investors willing to
buy assets in lira, as well as of direct investors in Turkey, they
"It's not a sustainable story," said Charles Robertson, chief
economist at Renaissance Capital. "You can't do this without
creating problems in the function of financial markets."
Write to Caitlin Ostroff at email@example.com and Anna
Isaac at firstname.lastname@example.org
(END) Dow Jones Newswires
August 04, 2020 09:30 ET (13:30 GMT)
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