ECB rejects Turkey's request for swap lines to bolster its economy

In another setback for Turkey and its efforts to bolster its finances during the COVID-19 outbreak, the European Central Bank (ECB) has rejected a request by the country’s central bank for swap lines, according to  of Greek website Kappa News.

The request, initially made last month, has not been accepted, Koutsomits told Ahval on Thursday, citing an unidentified source. He said an ECB official declined to comment.

Turkey has been facing significant monetary and financial pressures over the past two months due to the coronavirus pandemic, which has pummelled its exports, closed down its tourism industry and put significant pressure on the Turkish lira.

Turkey’s central bank has used tens of billions of dollars of its foreign exchange reserves over the past two months to defend the lira in the foreign exchange markets, reducing its stock of hard cash, net of liabilities, to around zero. 

In April, the central bank also applied to the U.S. Federal Reserve for swap lines, but it has appeared very reluctant to agree due to fraught diplomatic ties between Ankara and Washington.

Turkey’s government would need a strong endorsement from U.S. President Donald Trump to gain funding from the Federal Reserve, according to a former Fed committee member.

There is significant resistance in Washington to expanding dollar swap lines, William Dudley, who was vice-chair of the U.S. bank’s monetary policy committee between 2009 and 2018, told Reuters on Wednesday.

Turkey’s net foreign currency reserves stand at less than $30 billion and may be in negative territory when subtracting liabilities, which include currency swaps with state-run banks used to defend the lira. The currency fell to a record low of 7.269 per dollar last week.

The lira traded at 6.96 per dollar on Thursday, dipping below a key psychological level at 7 against the U.S. currency. But major financial institutions such as Goldman Sachs have warned that the lira could weaken significantly unless Turkey restores the confidence of investors.

As well as spending a large portion of its foreign currency reserves, the Turkish central bank has slashed interest rates to single digits from 24 percent in July last year. The reductions have come despite double-digit inflation and mean investors in Turkish bonds and bank deposit holders are getting scant returns for their money, encouraging them to sell the lira.

Turkish President Recep Tayyip Erdoğan has rejected calls by some investors and economists for Turkey to sign a loan accord with the International Monetary Fund to ease its financial situation. The budget deficit has widened markedly over the past year and the coronavirus is set to pummel tax income and other sources of revenue.

(Kappa News is an Athens-based online news provider. Please click here for content from the organisation.)