Turkish lira banknotes are pictured at a currency exchange office in Istanbul, Turkey, on Aug. 13, 2018.Murad Sezer/Reuters
The Turkish lira was back in free fall on Thursday, dropping 5 per cent as liquidity returned to a key London foreign-exchange market, prompting President Tayyip Erdogan to blame the currency’s weakness on attacks by the West.
After a major liquidity squeeze pushed the London swap rate to a record 1,200 per cent on Wednesday, Erdogan told young voters in a campaign event that some banks were playing a game with the currency ahead of nationwide local elections on Sunday.
The lira has been hit by a sweeping lack of confidence among Turks, leading them to snap up record holdings of dollars and gold. Uneasy relations with the United States and concerns about post-election government policy also hurt sentiment, beginning with a more than 4 per cent fall in the currency last Friday.
As lira liquidity improved on Thursday, the London overnight swap rate plunged to 35 per cent from the crippling 1,200 per cent a day earlier, Refinitiv Eikon data showed. It had stood at 24 per cent last week.
A senior official earlier told Reuters: “We made it clear that this process would not continue for long. It was a step against a speculative attack and it has ended. We do not expect a new speculative attack.”
But two senior bankers said this comment did not reflect the reality and it was not true that banks had only started providing liquidity again on Thursday.
“The assessment that local banks have restarted providing lira to the London swap market does not reflect the truth. Banks are behaving in line with their commercial obligations,” one banker said.
The lira weakened as far as 5.6465 per U.S. dollar from 5.33 on Wednesday. Last year, it plunged almost 30 per cent against the dollar. At 1431 GMT, it stood at 5.5900.
Sources had previously said lira liquidity would be squeezed until after Sunday’s local elections.
Rabobank emerging market forex strategist Piotr Matys said the market was braced for a volatile week for the currency after local elections on Sunday.
He said it was critical that Finance Minister Berat Albayrak announce a detailed package of reforms to preserve what is left of “Turkey’s severely damaged credibility.”
“His remarks since the lira crisis last year imply that he is fully aware of what investors expect from him. It is time to deliver,” Matys said.
“The response from the administration to the outcome of this crucial vote – seen by many as a referendum on President Erdogan and his executive powers – will be critical for the lira and local assets,” he added.
DISCIPLINE MARKET SPECULATORS
Erdogan said Turkey had thwarted attacks on the lira by the United States and the West generally.
“We must discipline the speculators in the market,” he said. “They can’t find lira now, they are struggling in terms of payments. The tables have turned. While they can’t do this, the lira firms and dollar falls.”
Erdogan also said Turkey must cut interest rates so that inflation falls, a view that counters that of many economists.
“The real problem is interest rates. I’m also an economist,” he said.
The central bank has taken a series of steps to underpin the lira this week, and bankers said it took one more on Thursday, raising its total lira swap sale limit to 30 per cent from 20 per cent for swap transactions that have not matured.
It had raised the limit to 20 per cent from 10 per cent on Monday in a bid to boost the bank’s forex reserves, which fell sharply in the first two weeks of March.
Those falls have raised uncomfortable questions about Turkey’s balance of payments and its ability to roll over its foreign loans – and how and from whom it would seek emergency reserves if necessary.
Central Bank Governor Murat Cetinkaya said on Thursday the bank continued to strengthen its reserves “decisively,” state-owned Anadolu news agency reported.
Total reserves last week increased by $4.3-billion to $96.7-billion as of March 27, Cetinkaya said. He said net reserves rose $2.4-billion to $28.6-billion in the same period.
This week’s spike in the overnight swap rate posed a huge hurdle to foreign investors looking to bet against the lira. They had instead sold off holdings of Turkish stocks and bonds, which have come under heavy pressure this week.
As the currency dropped on Thursday the cost of Turkey’s debt rose, with the yield on the benchmark 10-year bond climbing to 18.50 per cent from 18.21 per cent on Wednesday. It has risen two percentage points since last week.
The Istanbul share index, which weakened more than 12 per cent in the week to Wednesday’s close, rose 2 per cent.