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“Where did $10   billion go?”

This is the economics page headline in opposition daily Cumhuriyet on Saturday, which questions the discrepancy in Central Bank of…

“Where did $10   billion go?”

This is the economics page headline in opposition daily Cumhuriyet on Saturday, which questions the discrepancy in Central Bank of Turkey’s (CBRT) balance sheet, which had attracted the unholy attention of analysts and global investors for two weeks running. In a nutshell, the allegation is CBRT borrowing F/X from Turkish bank through SWAP transactions to boost its F/X reserves. Then, it lends part of these to state banks, which sell them in the spot market to  defend the lira. The gap, claims articles in Financial Times and Bloomberg, amount to roughly $10 billion which state banks might have wasted to stop the depreciation of TL vs American dollar, which is 10% down for the year.


Cumhuriyet quotes former CBRT governor Mr. Durmus Yilmaz   who lends credence to doubts  stating that until CBRT provides  sound explanations for  missing reserves, the perception of “back-door” intervention by state banks in the currency market cannot be dispelled.


The background


The Turkish lira weakened after the central bank struggled to explain moves in foreign-currency reserves, fueling concern about the state of the nation’s finances amid the looming prospect of more political upheaval.


The lira was down 1 percent after earlier sinking almost 2 percent, the biggest drop of any currency in the world. The Financial Times reported the central bank used short-term swaps with local lenders over the past month to bolster its net international reserves, which stood at $28.4 billion as of April 12.


Data compiled by Bloomberg show the outstanding amount on these transactions was $12.7 billion as of the end of last week.


A senior central bank official, speaking on condition of anonymity, suggested it was unreasonable to expect that reserves would move in tandem with currency swaps.


The amounts the regulator borrows from banks through swaps shows up in its balance sheet, but the changes in reserves are the outcome of wider transactions and operations, the official said.


Turkey has around $118 billion of foreign-currency debt coming due within the next 12 months and relies on the central bank’s buffers to meet its obligations if the flow of capital that finances the economy begins to slow. Foreign investors have already withdrawn a net $1.6 billion from the nation’s lira bond market this year amid political and economic turbulence that has rocked the country’s markets.


While there’s nothing at fault with the central bank’s accounting, its off-balance sheet liabilities need to be taken into account in assessing changes in reserves, a central bank official who spoke on condition of anonymity said. To avoid any unnecessary speculation, the central bank needs to clarify its net reserve position, they said.


Last month, JPMorgan Chase & Co. recommended investors sell the lira, citing the drawdown of the buffers in March. Earlier this month, Moody’s Investor Service said the drop was credit negative, as the country’s “very low” levels of reserves covered less than half of its shot-term external payments.


The drop doesn’t reflect any extraordinary developments, a central bank official said last month, asking not be identified, according to the Daily Star.




CBRT’s refusal to provide a clear and credible answer to allegations smacks of impunity which permeates all levels of Turkish  bureaucracy, limiting foreign investors’ appetite in Turkish assets.


More importantly, the threat of a run on TL assets can not be dismissed, as political uncertainty is still very high.  The High Election Council will rule on who won Istanbul elections next week.  A verdict to annul elections could trigger further F/X   purchases by residents, whose F/X holdings already reached 52% of the total deposit base in banks.


Tukey is also embroiled in a loud argument about the purchase of S-400 anti-missile systems with US and NATO, which don’t wish to see sophisticated Russian weaponry housed on Turkish soil.  US Congress is already advancing CAATSA sanctions legislation, which Trump will be hard put to veto, given bi-partisan backing.

Sanctions would potentially cover financial activities of all or some Turkish financial intermediaries further restricting credit flow into the country.

Turkey needs transparency and the trust of foreign funds and creditors desperately, but Ankara seems to prefer cloak-and-dagger games in a futile effort to defend its currency.


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