June 19, 2019 / 2:20 PM / a month ago

FACTBOX-Turkey fights on several fronts to defend lira

ISTANBUL, June 19 (Reuters) - Turkey has marshalled its state lenders and central bank to curb a selloff in the lira since late March that echoed last year’s full-blown currency crisis, which tipped the Turkish economy into recession.

The currency lost some 30% of its value against the dollar last year and has shed another 11% this year as investors fretted about the threat of U.S. sanctions, uncertainty over local election results, declining central bank reserves and a trend of Turks ramping up forex holdings.

Here are some of the efforts to support the Turkish lira:

STATE BANK INTERVENTIONS:

In the days before nationwide local elections on March 31, Turkey directed its state banks to withhold lira liquidity from London’s overnight swap market, a prime venue for investors looking to manage or hedge Turkish positions.

The squeeze lasted only a few days, but it sent rates in the market rocketing to a record 1,200% - so high that economists said they were no longer based on actual trading.

Another bout of lira weakness, in the days after Turkey’s election authority on May 6 annulled the result of an election in Istanbul that the ruling AK Party lost, prompted state banks to sell more than $4.5 billion in international markets.

The selling of dollars, especially during thin lira trade early and late in the day, helped to stabilise the currency but raised worries that Turkey was shedding more of its hard currency reserves.

FOREIGN EXCHANGE CURBS:

Turkey raised a tax on some foreign exchange sales to 0.1% from zero on May 15, a move meant to halt a months-long trend of Turks selling the lira for more stable dollars and euros. The so-called BSMV tax remained at zero for bank-to-bank transactions and those involving the Treasury.

Turkey’s President Tayyip Erdogan announced that exports, which help narrow the country’s current account deficit, will be exempt from the tax.

In another step some analysts said brought Turkey closer to capital controls, the banking watchdog on May 20 imposed a one-day settlement delay for foreign-exchange purchases of more than $100,000 by individuals. It was meant to prevent “unnecessary and unjust harm” from high-frequency traders, the watchdog said.

‘BACK DOOR’ TIGHTENING:

With inflation high, the central bank has kept its policy rate steady at 24% since September. But since an initial lira selloff on March 22, it has employed several secondary or “back door” tightening tools to boost confidence in the currency.

In late March and in early May, the central bank temporarily suspended repo auctions, which had the effect of raising the average cost of funding to 25.5%. It has also shut forex depo auctions and adjusted a foreign exchange reserve requirement.

On May 21, it started to hold repo auctions. Depo auctions were still closed on Wednesday.

Yet in a hint of a reversal, the central bank extended a liquidity facility for primary-dealer banks with a rate of 23% - below its policy rate of 24% - in a move meant to decrease banks’ average cost of funding.

RESERVATIONS OVER RESERVES:

The efforts by state banks and the central bank itself have sparked worries that Turkey is depleting reserves that may be needed to fend off another currency crisis.

To boost its forex reserves, which fell sharply in early March, the central bank lifted the lira swap sale limit to 40% from 10% and ramped up its use of swaps that month. It also opened a lira-for-gold swap market.

But many investors and economists saw this as a superficial way to boost net reserves, which stood at 166.16 billion lira ($28.48 billion) as of June 7.

In response, Central Bank Governor Murat Cetinkaya publicly defended the level of reserves in April. He also said rate hikes remained an option even though, in a statement a week earlier, the bank dropped a reference to possible further tightening if needed. In June, the bank took another step toward a rate cut when in a statement it shifted the focus to disinflation.”

LEGAL RESERVES, GOVERNMENT BONDS:

In May, Ankara was crafting unorthodox legislation to transfer some 40 billion lira ($6.6 billion) from the central bank’s legal reserves to the Treasury to shore up a larger-than- expected budget deficit. But days later the government scrapped the plan, which critics said risked further hobbling the central bank’s ability to react to a crisis.

Separately, Ankara tweaked regulations to force retirement funds to invest more in government bonds. The Treasury has also asked banks to buy more such bonds, bankers told Reuters, to balance the retreat of foreigners from the market.

INVESTIGATIONS, WARNINGS AND BANK RATES:

A day after the initial lira selloff on March 22, Turkey’s banking watchdog said it had launched an investigation into JP Morgan and other lenders, including over whether a research report by the Wall Street bank had hurt the reputation of Turkish banks and caused volatility.

BDDK watchdog head Mehmet Ali Akben said on May 17 that all Turkish banks need to protect the lira against “speculators,” adding he expected them to make an effort to turn foreign-currency deposits into lira.

The squeeze on lending could stabilise the lira and help banks meet rising costs, though it reverses months of pressure from the government regulator to keep a lid on borrowing costs as the economy tipped into recession.

Separately in June, two Bloomberg News reporters were indicted and face up to five years in jail after a complaint filed by the country’s banking watchdog BDDK about a story published in August 2018, during the worst days of the currency crisis. The two reporters are accused of trying to undermine Turkey’s economic stability.

LONGER-TERM BAILOUT:

Turkey’s plan to clean up some $13 billion in bad energy loans, one of the worst hangovers from last year’s currency crisis, has taken shape over the last couple of months even as some banks held out for the government to agree to safeguards and higher electricity prices.

The planned legislation would protect lenders from sharp losses as the debt is removed from their books, safely packaged as funds, and sold to foreign investors, perhaps after a couple of years. (Reporting by Jonathan Spicer; Additional reporting by Ezgi Erkoyun; editing by Daren Butler, Catherine Evans, Larry King)

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