In a day in which the dollar set new highs against all emerging market pairs and global risk was on the defensive, the Turkish Lira bucked the trend and extended its rapid rebound from record lows, after Turkish regulators imposed new "soft capital controls" to prop up the battered currency, making it even harder for banks to short the currency through the swap market.
One day after Turkey suspended mark-to-market for banks in a bid to offset fears about debt rollover and capital shortfalls, the Ankara-based Banking Regulation and Supervision Agency (BDDK) announced that the total amount of foreign currency and lira swap and swap-like transactions can’t exceed 25% of banks’ legal shareholder equity; the announcement came just 48 hours after a 50% was imposed on Monday, which however failed to make much of a dent in the selloff.
The latest move limits funds’ access to lira liquidity in the offshore swap market and makes it harder for them to borrow the currency from local lenders and short it. The rate on overnight dollar-lira swaps surged more than 12% points to 34.5%, the highest level since 2003.
“They are killing offshore lira liquidity to stop foreigners shorting the lira,” said Timothy Ash, a strategist at BlueBay Asset Management in London.
Then again, this strategy - which just recently was attempted by China - tends to have a very short-term effect, as it does nothing to alleviate the underlying reasons behind a currency selloff.
For now however it is working, and the lira jumped for a second consecutive day, surging as much as 7% against the dollar with the USDTRY briefly sliding below 6.00, reversing much of the decline triggered by tensions with the U.S. Those tensions have been centered on a dispute over the detention of an American pastor, which resulted in tariffs and sanctions. The dispute exacerbated existing concerns about President Recep Tayyip Erdogan’s unorthodox approach to economic policy.
While on Monday the central bank promised “all necessary measures” to maintain financial stability, it didn’t mention higher interest rates and hasn’t raised them yet, even though Turkish corporate and banking executives have asked it to. Then on Tuesday,in another attempt to stabilize sentiment, we reported that the banking watchdog took an unconventional step to support the nation’s beleaguered banks, temporarily excluding the effect of day-to-day securities losses on how their financial strength is calculated.
The suspension of mark-to-market calculations on capital adequacy ratios will continue until prices of securities “normalize,” the banking regulator said in a document sent to banks on Tuesday. The "recent speculative volatility in markets" caused an “unfair erosion" in banks’ capital strength, it said. Under mark-to-market accounting, portfolios must reflect assets’ current market values rather than their book values.
The emergency moves followed the publication of a report from Goldman last week which spooked traders, and predicted that USDTRY above 7.1 would wipe out the banks' excess capital.
The average capital adequacy ratio of the banking system stands at 16 percent as of the end of June, according to official data. Every 10 percent decline in the lira reduces capital adequacy ratios by around 50 basis points on average, according to the Goldman Sachs report.
The BDDK also published a new set of regulations on loan restructurings by banks, financial leasing and factoring firms in the Official Gazette on Wednesday, Bloomberg reports. The new rules allow banks to extend the maturities of outstanding loans to clients, refinance them, make new loans to help troubled companies, and seek new collateral. Banks can also demand debtors sell assets to repay debts and improve their finances. Overdue loans can now be restructured within two years from the day a framework agreement is signed.
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Meanwhile going back to the ongoing escalation in political tensions between the US and Turkey, one day after Erdogan vowed to boycott US electronics products, including the iPhone, Ankara slapped an additional tax on imports of a broad range of American goods. Turkey announced it would impose an additional 50% tax on U.S. rice, 140% on spirits and 120% on cars. There are also additional charges on U.S. cosmetics, tobacco and some food products. The was Erdogan's latest retaliation for the Trump administration’s punitive actions over the past few weeks to pressure Turkey into releasing an American pastor.
Bloomberg calculated that the items listed in the decree accounted for $1 billion of imports last year, similar to the amount of Turkish steel and aluminum exports that were subjected to higher tariffs by President Donald Trump last week. The decision shows Turkey giving a proportionate response to American “attacks” on the Turkish economy, Vice President Fuat Oktay said in tweets this morning.
Zor günlerde liderinin etrafında kenetlenen Milletimiz, kural tanımaz tavırlara karşı uluslararası kamuoyu ile de kenetlenmiş, haksızlıklara karşı Dünya’yı cesaretlendirmiştir. Durmak yok, yola devam.— Fuat Oktay (@fuatoktay06) August 15, 2018
In addition to imposing the new tariffs, Erdogan assured the spat with Trump would get worse before it gets better after a local court denied US pastor Brunson's appeal to be released from house arrest. A local court in Izmir rejected the appeal by the US Pastor to be released from house arrest pending his trial on espionage and terrorism-related charges.
A higher Turkish court was still considering the appeal and Brunson's lawyer, Ismail Cem Halavurt, told CBS News on Wednesday that he would not consider the appeal formally rejected until the higher court issues it's ruling. He said that was likely to happen by the end of business on Wednesday. A previous appeal by Brunson was rejected at the end of July.
In response to this barrage of new developments out of Turkey, we expect Trump will shortly escalate his own crackdown on Turkey most likely in a tweet which in turn will send the lira plunging once more.