As Lira Swings, Some Foreign Banks Review or Scale Back Turkey Exposure

A money changer holds Turkish lira and US dollar banknotes at a currency exchange office in Ankara, Turkey December 16, 2021. (Reuters)
A money changer holds Turkish lira and US dollar banknotes at a currency exchange office in Ankara, Turkey December 16, 2021. (Reuters)
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As Lira Swings, Some Foreign Banks Review or Scale Back Turkey Exposure

A money changer holds Turkish lira and US dollar banknotes at a currency exchange office in Ankara, Turkey December 16, 2021. (Reuters)
A money changer holds Turkish lira and US dollar banknotes at a currency exchange office in Ankara, Turkey December 16, 2021. (Reuters)

Some foreign banks are reviewing limits for dollar lending to Turkish businesses amid the lira's wild fluctuations, two banking sources said, in a move that could drive up borrowing costs if the foreign lenders cut back.

At least two foreign banks have also withdrawn from cash trading the lira, separate sources at those banks said, potentially limiting local firms' access to foreign currency and hindering foreign investment.

The lira has been on a roller-coaster ride since September when Turkish President Recep Tayyip Erdogan pushed for interest rate cuts.

On Monday, it plunged 10% to 18.4 to the US dollar, taking its losses for the year to almost 60%, before whipsawing back to 12 after Erdogan unveiled a plan he said would guarantee local currency deposits against market fluctuations.

Turkish banks are regular international borrowers, and foreign lenders' reluctance to expose themselves to large currency gyrations could make it more expensive and more difficult for them to refinance their debts.

Fitch estimates foreign liabilities of Turkish lenders - mostly short-dated and held by large international banks - were equivalent to 22% of their funding at the end of June.

Total external debt at Turkish banks amounted to $138 billion at the end of the third quarter, with $83 billion due within 12 months, Fitch estimates.

Turkish banks rolled over their one-year foreign currency loans in October before the lira's latest plunge, but could be impacted in the next roll-over period in the first quarter, a regional banker said.

"We had a few banks that came to us and said they will review Turkish limits for the next roll-over period based on the kind of update they get on the economy," the banker said.

A second banking source said their bank had recently further limited short-term trade business with Turkey after cutting exposure on term loans.

"Every single deal needs to be approved by the risk department," the source said.

The sources declined to be named due to the sensitivity of the matter.

One senior Turkish banker said on Tuesday he was not aware of foreign counterparts reviewing or curbing lending.

Turkish banks have a long record of being able to access foreign funding despite multiple periods of stress, said Lindsey Liddell, head of Turkish bank ratings at Fitch.

Syndicated loan rollovers in the fourth quarter were at a lower cost than in the first half of 2021, with roll-over rates largely remaining above 100%, despite the market volatility, she said.

"Nevertheless, foreign currency liquidity could come under pressure from a prolonged market closure or significant foreign currency deposit outflows," Liddell said.

"Banks' access to foreign currency liquidity has also become more reliant on the central bank and could be uncertain at times of market stress."

The first banker said some Turkish companies had also made requests to relax conditions on their loan agreements due to the market turbulence, without providing details.

Caution

Erdogan's push for 500 basis points of interest rate cuts since September has set off Turkey's worst currency crisis in two decades, with the lira crashing nearly 40% in just the five weeks to last Friday.

Bid-ask spreads on the lira, a gauge of how easy it is to trade the currency, have widened sharply in recent days, with quotes nearing their widest in about a month.

In a further sign of waning investor confidence, implied volatility on the lira - or expected price swings - jumped to the highest on record as the lira fluctuated wildly.

One large European bank and an Asian bank said they had stopped cash trading in the lira and were extremely cautious about offering liquidity for forwards contracts, citing market volatility and policy risks. They also declined to be named due to the sensitivity of the issue.

JPMorgan has pulled back from offering algorithmic trading facilities in the lira, according to a notice seen by Reuters late last week when the market crashed. The US bank did not immediately respond to a request for comment.

John Marley, chief executive of consultancy forexxtra, said some banks were likely to switch to a system where they will only execute trades if they have another client transaction to offset it, meaning they take on no direct risk themselves.

"The last thing in the world you need is a small position in the lira blowing a hole in your annual trading statement," he said.

Still, for Sergey Dergachev, a senior portfolio manager at Union Investment, the currency crisis is unlikely to trigger defaults on international bonds by Turkish corporates, partly because they refinanced 2022 maturities earlier this year.

"Most issuers are also exporters and benefit operationally from lower lira levels, and severe credit deterioration ... is not a likely scenario I envisage for the Turkish corporate Eurobond issuers, and stay invested in them," he said.



Dollar Tumbles as Investors Seek Safe Havens after US Tariffs

US Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
US Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
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Dollar Tumbles as Investors Seek Safe Havens after US Tariffs

US Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
US Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

The dollar weakened broadly on Thursday, while the euro rallied after President Donald Trump announced harsher-than-expected tariffs on US trading partners, unsettling markets as investors flocked to safe havens such as the yen and Swiss franc.

The highly anticipated tariff announcement sent shockwaves through markets, with global stocks sinking and investors scrambling to the safety of bonds as well as gold.

Trump said he would impose a 10% baseline tariff on all imports to the United States and higher duties on some of the country's biggest trading partners.

The new levies ratchet up a trade war that Trump kicked off on his return to the White House, rattling markets as fears grow that a full-blown trade war could trigger a sharp global economic slowdown and fuel inflation, Reuters reported.

The dollar index, which measures the US currency against six others, fell 1.6% to 102.03, its lowest since early October.

The euro, the largest component in the index, gained 1.5% to a six-month high of $1.1021.

Trump has already imposed tariffs on aluminium, steel and autos, and has increased duties on all goods from China.

"Eye-watering tariffs on a country-by-country basis scream 'negotiation tactic', which will keep markets on edge for the foreseeable future," said Adam Hetts, global head of multi-asset and portfolio manager at Janus Henderson Investors.

The risk-sensitive Australian dollar added 0.56% to $0.63365, while the New Zealand dollar climbed 0.9% to $0.5796.

The yen strengthened to a three-week high against the dollar and was last up 1.7% at 146.76 per dollar, while the Swiss franc touched its strongest level in five months at 0.86555 per dollar.

"Negotiations are now going to be front of mind. This is probably the other big part of why we're seeing some of these currencies outperform," said Nicholas Rees, Head Of Macro Research at Monex Europe.

"It's very difficult actually to see how other countries make concessions that would encourage the US to lift these tariffs. And I think that's a big underpriced risk."

Investors are worried that some US trading partners could retaliate with measures of their own, leading to higher prices.

EU chief Ursula von der Leyen described the tariffs as a major blow to the world economy and said the 27-member bloc was prepared to respond with countermeasures if talks with Washington failed.

Worries about a global trade war have intensified since Trump stepped into the White House in January, combining with a slew of weaker-than-expected US data to stoke recession fears and undermine the dollar.

The dollar index is down more than 5.7% this year.

"These tariffs have certainly significantly increased the risks to the downside for global growth, so on balance we think that will eventually start to become more supportive again for the dollar," said Lee Hardman, senior currency analyst at MUFG.

In Asia currencies, China's onshore yuan slid to its weakest level against the dollar since February 13. China's offshore yuan also hit a two-month low.

The Vietnamese dong slumped to a record low.

Elsewhere, the Mexican peso and Canadian dollar strengthened.

Canada and Mexico, the two largest US trading partners, already face 25% tariffs on many goods and will not face additional levies from Wednesday's announcement.