The last few months have seen the Turkish Lira rallying, rebounding off record lows, despite nothing positive coming from that country... and now we may have a better idea of how this lift was achieved (or how investors were fooled).
As Bloomberg reports, according to two people with direct knowledge of the matter said, Turkey received around $1 billion worth of funds from China in June under a swap agreement that dates back to 2012.
The cash boosted Turkey’s foreign reserves in an election month and at a time when they were under intense scrutiny from investors.
The scrutiny was due to the fact that, as we detailed previously, traders were questioning the reality of Turkey's reserve data - which had been grossly manipulated for swap contracts and was - in real terms - practically zero...
The chart below shows two sets of numbers: Turkey's true net foreign reserves, and the number that the central bank had used for public consumption, which includes the nominal amount of swaps.
Confirming the FT's analysis, a former senior official at Turkey’s central bank, who did not wish to be named (as it would mean an instant prison sentence by the country's "executive president"), said the extra dollars had been borrowed, not earned. "This is not an orthodox [approach to] central bank reserve build-up."
So China stepped in to bail out Erdogan. The June inflow was the first time Turkey received such a substantial amount under the lira-yuan swap agreement with Beijing, one of the people said.
The question now is - what was Erdogan's quid pro quo here. With NATO scrambling over Turkey's decision to install Russian missile defense systems, is this 'friendly gesture' from China designed to confirm BRI issues will be swept under the carpet?