Turkey to continue withholding lira liquidity overseas at least until Sunday’s elections: report

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An exchange office worker counts Turkish lira banknotes in Istanbul. AFP PHOTO / OZAN KOSE / AFP PHOTO / OZAN KOSE

Turkey will continue directing its banks to withhold lira liquidity from a key overseas market at least until after Sunday’s local elections, three sources familiar with the matter said on Wednesday, intensifying the government’s efforts to defend a currency still haunted by last year’s crisis, Reuters reported.

The government’s latest stop-gap measure to restore confidence in the lira helped spike the London overnight swap rate to 700 percent, by far its highest reading on record. That presented a massive hurdle to foreign investors looking to bet against the Turkish currency or hedge positions.

The move prompted another round of calls by investors and economists for longer-lasting reforms to stem a growing tide of Turks losing confidence and turning to foreign cash.

While the lira came under fresh pressure on Wednesday, easing 1.6 percent to 5.4115 against the dollar, steps taken by the central bank in recent days have succeeded in erasing its steep losses on Friday. Last year the lira lost nearly 30 percent of its value.

Turkey’s main BIST 100 index tumbled 3.6 percent, with the banking index down 4 percent, after three straight days of losses. The benchmark 10-year bond yield rose to 18.23 percent, its highest since October, after a spike this week.

The London overnight swap rate, at 700 percent, was so high that economists said it was no longer based on actual trading. It was up from 330 percent on Tuesday, and 24 percent last week. The weekly rate jumped to 200 percent from last week’s 22 percent, Refinitiv Eikon data showed.

Turkish President Recep Tayyip Erdoğan is campaigning hard ahead of nationwide municipal elections set for Sunday in which his ruling Justice and Development Party (AKP) could lose control of Ankara and other big cities.

One of the sources told Reuters the move to direct Turkish banks to withhold lira liquidity in London was only temporary.

“The move to not provide lira to the swap markets isn’t a process that can go on for a long time. It will continue until after the elections. The lira is very tight abroad,” one of the sources said.

“These sort of steps aren’t policies that can be implemented in the long term. They are done for 10-15 days and during speculative attacks,” he added.

The lira had weakened to 5.8490 on Friday before settling at 5.7625, its lowest closing value since October.

The lira’s meltdown on Friday marked its worst performance since August when a full-blown currency crisis took hold and tipped Turkey’s economy into a recession that could last deep into this year.

The government has launched investigations into bankers, alarming foreign investors, alongside the central bank’s “back door” measures to control liquidity.

Late on Monday, Turkish banks started to keep lira swap market transactions in London well below a 25 percent limit set by the banking watchdog, four sources told Reuters on Tuesday, causing overnight and weekly swap rates to soar.

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