Turkey $2 Billion Lira Defense Fails to UBS as Reserves Sink 9% From High

Turkey may lack resources to stop the lira’s tumble after selling more than $2 billion this week to prop up the currency, extending a two-month campaign to end the declines, according to UBS AG and Commerzbank AG.

Central bank reserves fell more than 9 percent from a record high of $93.9 billion on July 8 to $85.1 billion on Oct. 7 as policy makers accelerated dollar sales. Turkey’s foreign- exchange holdings equal about four months of imports and represent 42 percent of the government’s annual external financing needs, Timothy Ash, the head of emerging-market research at Royal Bank of Scotland Group Plc in London, said in an e-mailed report.

“We are skeptical that intervention will be sufficient to arrest the lira’s decline,” Manik Narain, an emerging-market strategist at UBS in London, said by e-mail yesterday. “The central bank of Turkey’s foreign-exchange reserves ammunition is weak when one takes short-term external debt into consideration.”

The lira fell 0.2 percent to 1.8613 per dollar at 6:57 p.m. The currency has dropped 17 percent against the dollar this year, the second worst performance after South Africa’s rand among 25 emerging-market currencies tracked by Bloomberg, as the nation’s record current-account deficit, equal to about 10 percent of gross domestic product, and concern over the spreading European debt crisis dented investor confidence.

Tightening Cycle

Yields on two-year benchmark debt rose 20 basis points, or 0.20 percentage point, to 8.75 percent, the highest level in 11 weeks, according to an RBS local benchmark index of the securities.

The central bank might drop a reference to a possible cut in interest rates at a meeting of its Monetary Policy Committee tomorrow and “may launch a tightening cycle,” said Selim Gulkan, a fixed-income trader at Turk Ekonomi Bankasi AS, in a phone interview from Istanbul.

The cost of insuring five-year Turkish debt rose for the second day after reaching a five-week low on Oct. 17. Credit- default swaps, which rise as perceptions of creditworthiness worsen, climbed 6.24 basis points to 250.8 today, CMA data show.

Foreign-exchange reserves are at a “threshold that markets would feel uncomfortable with,” said Simon Quijano-Evans, the London-based head of research for Europe, the Middle East and Africa at ING Groep NV, the biggest Dutch financial services company.

“The market is now challenging the central bank’s commitment and its capacity to contain the currency depreciation,” Murat Toprak, a currency strategist at HSBC Holdings Plc, said yesterday. “The central bank has now no choice but to be more aggressive.”

Selling Dollars

Policy makers sold more than $500 million in exchange for liras yesterday in the central bank’s first direct intervention in currency markets since 2006, according to three traders who asked not to be identified because they are not authorized to speak publicly on the matter. Policy makers also sold $750 million earlier in the day through a pre-announced auction.

The bank sold $750 million today after offering as much as $1.35 billion in an auction.

Turkey joins Indonesia, India, Brazil and Russia in selling dollars to stem currency declines as concern that the global economy may be headed for a recession reduces demand for emerging-market assets. Russia’s holdings of gold and foreign currency total about $510 billion, India’s $312.2 billion, Brazil’s $350.7 billion and Indonesia’s $114.5 billion, according to data compiled by Bloomberg.

‘Useful and Sufficient’

Turkey’s central bank started selling dollars for lira on Aug. 5, the day after it cut the benchmark one-week repo rate to a record low to help protect the economy from a slowdown. The lira’s slide has been “useful and sufficient,” Governor Erdem Basci said on Sept. 30. The currency traded at 1.8599 per dollar that day.

The central bank intervened after seeing “unhealthy prices as a result of speculative behavior linked to a loss of market depth,” according to an e-mailed statement from the bank in Ankara.

“I do not believe that the direct interventions will have any more effect than the foreign-exchange auctions did because the underlying problem is the same,” Thu Lan Nguyen, a currency strategist at Commerzbank in Frankfurt, said by e-mail. “It would run out of reserves quickly.”

To contact the reporters on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net; Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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