Turkey targets lira short-selling with focus on niche debt

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(Bloomberg) —

Turkey plans to restrict purchases by domestic investors of new lira bonds sold by multinational lenders, the latest effort to curb short selling of the local currency by limiting the supply of liquidity in the offshore market.

In recent months, the central bank has issued verbal warnings to local lenders to refrain from marketing such securities, known as supranational bonds, to their customers, according to people familiar with the discussions. They spoke on condition of anonymity because the information is not public.

The central bank declined to comment.

Authorities plan to further tighten procurement controls, according to a senior Turkish official with knowledge of the matter. The aim is to increase the cost of speculation against the lira by making less local currency available outside of Turkey.

The implied overnight lira forward yield is already around 100% and the cost of borrowing in the offshore market could increase further if the latest measure is applied.

The new policy is a variant of an approach used repeatedly by authorities to thwart the depreciation of the pound since a currency crisis in August 2018. In March, Turkey’s banking regulator warned local lenders not to provide liquidity in lira to companies seeking to speculate against on the offshore market.

Such restrictions cause upheaval in the market and may bring temporary relief to the lira, but without addressing the reasons for its chronic weakness. Under pressure from an ultra-loose monetary policy and the fastest inflation in two decades, the Turkish currency has lost nearly 20% against the dollar this year, the biggest drop among its emerging market peers.

EBRD, IFC

The final step would target lira-denominated debt issued by companies like the International Finance Corporation, the private sector arm of the World Bank Group, and the European Bank for Reconstruction and Development.

This year alone, the London-based bank known as EBRD alone has sold more than two dozen lira debt issues, raising the equivalent of more than $500 million.

Supranational securities have been popular among local investors as they offer better yields with higher credit ratings than comparable domestic notes.

The urgency to take more action to defend the lira is increasing after its depreciation accelerated in recent weeks. Marginal measures including a new deposit program that protects savers from the volatility of the currency bought for a while by ensuring a period of stability after a crash in December.

But efforts, alongside unannounced interventions in the foreign exchange markets by Turkey’s central bank and state lenders, have failed to stem the lira’s recent volatility as investors focus on runaway inflation.

Consumer prices rose 73.5% a year in May, nearly 15 times the central bank’s official target.

©2022 Bloomberg LP

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