Several hours after Turkey unveiled its first tentative steps toward capital controls when late on Sunday the country’s banking regulator imposed a limit on the amount of foreign currency and lira swap and swap-like transactions (not to exceed 50% of the bank’s shareholder equity) yet failed to halt the collapse in the Turkish lira, the Turkish central bank made its first move to support the financial system and investor confidence, also without much success.
Early on Monday morning, just after 1am EDT, the Turkish central bank issued a statement in which it promised to “take all necessary measures,” and lowered the amount commercial lenders must park at the regulator while easing rules that govern how they manage their lira and FX liquidity. And while the monetary authority said all options were on the table, there was no mention of the one thing the market was eagerly looking for, namely higher interest rates.
The central bank said easing the reserve requirements would release as much as 10 billion liras, $6 billion in dollars and $3 billion worth of gold. It also eased collateral rules and tripled the amount of liras banks can borrow in return for their FX holdings to €20 billion. The $50 billion limit on the amount of foreign-exchange banks can borrow in return for their lira assets can also be changed if needed, it said.
The full list of measures announced by the central bank which it said “will support financial stability and proper functioning of markets” was the following:
- The bank revised discount rates used against lira transactions to provide lenders with flexibility in their collateral management: “Through this regulation, the discounted value of banks’ current unencumbered collaterals is projected to increase by approximately 3.8 billion Turkish liras”
- FX deposit limits for Turkish lira transactions of commercial lenders were raised to 20BN euros from 7.2BN.
- When needed, in addition to one week repo, the bank may hold “traditional repo auctions or deposit selling auctions may be held with maturities no longer than 91 days.”
- When there is higher funding gap than usual, more than one repo auction per day can be conducted with maturities of 6-to-10 days.
- Banks will be able to borrow FX deposits in one- month maturity in addition to the current, one-week instrument they have: “Banks’ current foreign exchange deposit limits of around 50 billion dollars may be increased and utilization conditions may be improved if deemed necessary.”
In all, the central bank said it “will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary,” according to the statement released early Monday.
The central bank’s anticipated intervention was part of a plan announced by Treasury and Finance Minister, and Erdogan’s son-in-law Berat Albayrak late Sunday, when he also rejected capital controls as an option to stem outflows of hard currency – even as the bank regulator hinted at just that – and vowed to crack down on those he said were spreading damaging rumors that deposits would be seized.
Indeed, in what may be a more problematic, if expected, part of Turkey’s intervention, the Istanbul Chief Prosecutor started a probe against “persons who have carried out actions that threaten economic security,” according to state-run Anadolu Agency.
Separately, Capital Markets Board in Ankara issues warning about “misleading news” on markets: “Those who report misleading, wrong and false stories” on listed companies, banks and other financial entities that could impact investor decisions could be fined or sentenced to two to five years of imprisonment, the regulator said on its website, in taking a page of Erdogan’s own personal style of “dealing” with opponents.
Following Albayrak’s comments, we reported that the banking regulator put restrictions on dollar-lira swaps in an attempt to make it harder for offshore investors to bet against the currency.
And yet, as Bloomberg reported, while the central bank action was more comprehensive, its use of fringe tools is unlikely to be a “game changer” for the lira, Global Securities analysts including Research Director Sertan Kargin said in an emailed report.
“The latest liquidity measures could provide some buffer to cushion the lira against speculative moves,” the report said. But, it said, the move “remains insufficient to provide full protection for the lira in times of distress in the absence of an outright orthodox rate hike.”
And as Erdogan made quite clear in his latest speech on Sunday, both a rate hike and an IMF intervention remain solidly off the table for now.
As a result, whereas the central bank’s intervention did briefly stem the losses in the TRY, pushing it back above 6.50 against the dollar, since then the currency has resumed its slide and is back to the level it traded at for much of the overnight session, just around 6.90, and down nearly 25% over the past 2 days.
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