Mar 26 2019

Surge in Turkish swap rates may hurt economy – investor

A surge in Turkish lira-dollar swap rates will probably cause damage to the country’s economy, said Paul McNamara, the lead manager on emerging market bond and currency long-only and hedge fund strategies for Swiss investment firm GAM.

The jump in rates to over 300 percent on Tuesday, which followed a slump of more than 4 percent in the lira on Friday, is going to make the currency less liquid and cost some investors and speculators a lot of money, McNamara said in e-mailed comments to Ahval.

“This is overspill from the currency volatility of Friday, extremely painful to foreigners but not something that directly affects the domestic economy. However, the domestic effects are real, and will likely hurt the domestic economy,” McNamara said.

Turkey’s central bank and regulators have limited Turkish banks’ ability to lend offshore, creating a dearth in liquidity, following a currency crisis last year that reduced the lira’s value against the dollar by almost a third. The central bank has increased those efforts since Friday to shore up the lira.

“This has created a squeeze where foreigners desperate to borrow lira cannot access them to settle trades, so are forced to borrow at extraordinary rates,” McNamara said. “The rate quoted is the offshore rate (applies only to foreigners) – the onshore rates are higher, but not behaving in this odd way.”

The Turkish economy entered a technical recession in the final three months of last year, defined as two-straight quarters of negative quarterly growth, despite government tax cuts and other emergency measures.

The lira has lost 4.6 percent against the dollar this year, trading at 5.5413 per dollar at 4:58 p.m. in Istanbul on Tuesday.