Turkey’s state-run banks spend more than $1 billion to support lira

Turkey’s state-run banks have shelled out more than $1 billion to support the lira this week.

The banks are selling dollars for lira as the currency comes under renewed selling pressure due to escalating military clashes in Syria and concerns over economic policy.  

Government-owned lenders flooded the market with dollars on Thursday, selling an estimated $800 million, Bloomberg reported yesterday, citing two traders with knowledge of the matter. The move was the latest in recent days and weeks aimed at stabilising the currency.

The Turkish lira is plumbing its lowest levels since May last year after the Turkish military and the army of President Bashar Assad clashed in the northwest Syrian province of Idlib, where Turkey is backing Islamist fighters against Damascus. Two Turkish soldiers died in fighting on Thursday.

Russia’s Foreign Ministry warned yesterday that Turkey should drop its support for militants in Idlib, which risks escalating the conflict. Moscow is backing Assad’s offensive with air power. 

The lira dropped 0.3 percent to 6.11 per dollar as of 11:31 a.m. local time in Istanbul on Friday, extending its recent lows. Investors are concerned that tensions in Syria and loose monetary and fiscal policies, designed to pump prime Turkey’s economic growth, may lead to further financial instability. The lira has lost more than 35 percent against the dollar since a currency crisis in 2018.

The support of state-run banks for the lira is a delaying tactic meant to substitute tackling Turkey’s real economic problems, Erik Meyersson, senior economist at Swedish bank Handelsbanken, said in comments on Twitter.

Turkey’s central bank lowered interest rates by 50 basis points, or 0.5 percentage points, to 10.75 percent this week, reducing borrowing costs for the sixth-straight meeting. Economists see the rate cuts as an attempted “easy fix” to boost the economy following a severe downturn sparked by the currency crisis. Instead, the authorities should be implementing structural reforms to ensure sustainable growth, they say.

Interest rates in Turkey are now negative, when accounting for annual inflation, which stood at 12.2 percent in January.