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Turkish Bank Wields ‘Big Stick’ on Lira as Reserves Dwindle

Turkey's Central Bank Governor Erdem Basci
Turkey's Central Bank Governor Erdem Basci. Source: Central Bank of Turkey via Bloomberg

Turkey’s central bank sold $1.1 billion in two days of record-breaking auctions, depleting reserves in an attempt to stem the lira’s slide.

The Ankara-based bank sold $350 million today after offering as much as $1.35 billion. Yesterday, it made the same offer and sold $750 million, the biggest auction in its history. The bank said it’s ready with “large amounts” to stamp out excess exchange-rate volatility. International reserves stood at $87.5 billion on Sept. 30 and since then the bank has sold $1.2 billion.

The lira sunk 17 percent against the dollar in the first nine months of this year, the second-worst performer among 25 emerging-market currencies tracked by Bloomberg, after South Africa’s rand. Governor Erdem Basci said on Sept. 30 that the decline had been “useful” in helping to boost exports and was now enough. The bank wouldn’t welcome further falls, he said.

Yesterday’s sale “was sufficient to show that the central bank carries a big stick,” said Inan Demir, chief economist for Finansbank AS in Istanbul, the lender owned by National Bank of Greece. Still, “large selling of foreign exchange is sure to raise concerns regarding the depletion of reserves.”

The lira rose to its highest level in two weeks after today’s sale announcement and was at 1.854 per dollar at 2:45 p.m. local time. Yields on two-year benchmark bonds dropped 6 basis points to 8.48 percent. The previous biggest dollar sale at an auction was in June 2006, when the bank sold $500 million.

Basci also cut the foreign-currency reserves that banks must deposit against their liabilities yesterday, freeing up $1.3 billion in liquidity.

Bolster Currencies

Policy makers in emerging markets are seeking to bolster weakening currencies, as concern about a global slowdown leads investors to pull money out of riskier markets. Russia’s central bank sold about $8 billion to shore up the ruble last month, the most since it arrested the currency’s devaluation in January 2009, Chairman Sergey Ignatiev said yesterday.

Brazil’s central bank will keep acting in the dollar futures market and has “no limit” on how much it can use derivatives to stem a decline in the real, said Aldo Mendes, director of monetary policy at the bank. Authorities will combat “herd behavior” in the financial markets, Korean Finance Minister Bahk Jae Wan said Sept. 23.

“Intervention in the currency in this global climate is not very suitable,” said Suha Yaygin, deputy chief of emerging markets at Toronto-Dominion Bank in London. “It can fail as much as it can succeed because things abroad are very problematic.”

Lira’s Decline

Today’s Turkish sale increased the total amount of foreign reserves spent by the central bank to defend the currency to $4.32 billion since Aug. 5. During the same time, the lira has declined more than 6 percent against the dollar.

“Halting foreign-currency sales would conserve hard-earned reserves,” the International Monetary Fund said Sept. 19.

The bank has been building up foreign-currency reserves with dollar purchases since 2001 and said today the position is “strong” when compared to the country’s short-term debt. The reserves compare with Russia’s $526 billion in international currency and gold and Brazil’s $352 billion.

“Out of Turkey, Brazil and Russia, I would say that Turkey is the most vulnerable with reserves of $85 billion being less than the current annual trade deficit,” Michael Shaoul, chairman of Marketfield Asset Management in New York, said in e-mailed comments. The situation leaves Turkey’s “firepower insufficient to deal with sustained capital repatriation from debt and equity markets.”

Deficit Widened

Turkey’s 12-month current-account deficit widened to a record $74.6 billion in July, or about 10 percent of gross domestic product. Basci argues a slowing economy, combined with a weaker lira, will lead to a “rapid” adjustment in the current-account gap.

The bank said it may continue large foreign-exchange sales in the daily auction if necessary. It also allowed banks to keep a larger portion of their compulsory reserves in foreign currency, raising the limit to 20 percent of lira liabilities from 10 percent. The central bank said that will increase its reserves by $3.6 billion.

The higher limit “neutralizes the reserve impact” of the sales, Demir said. “The bank is able to ease monetary policy, provide foreign-exchange liquidity and increase reserves at the same time.”

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