Turkish lira hits record low as investors warn of possible crisis

Turkey’s lira dropped to a record low on Thursday as some investors warned that depleted foreign currency reserves and negative interest rates may be a precursor to a full-blown financial crisis.

The lira weakened by 0.7 percent to 7.24 per dollar in morning trading in Istanbul. That beat the lows the currency plumbed during a currency crisis in August 2018.

Turkey’s central bank has sold tens of billions of dollars of its foreign currency reserves defending the lira. It has slashed interest rates to single digits - inflation stands at 11.9 percent – meaning that the lira has become unattractive to many savers and investors.

Treasury and Finance Minister Berat Albayrak sought to reassure concerned foreign investors during a conference call on Wednesday, saying the central bank’s gross reserves of just over $50 billion were sufficient. But minus liabilities, its net reserves are negative.

Turkey has been seeking swap lines with other central banks to help support the lira and cushion the impact of the spread of the COVID-19 virus on its economy.

But a Fed policymaker - asked on Wednesday about extending swap facilities to Turkey and others in need - said the institution already had facilities with countries that have a relationship of “mutual trust” with the United States and the highest credit standards.

Thomas Barkin, the Richmond Fed President, said the swaps were designed to stabilise financial markets and not provide funding. Turkey has access to an overnight repo facility, like other countries, he said. Repo, or a repurchase agreement, is a form of short-term borrowing.

It is “just a matter of time” before the weakening lira and the low reserves lead to a crisis, Nikolay Markov, senior economist at Swiss investment firm Pictet Asset Management, who was on the conference call with Albayrak, told Reuters. The crisis could consist of Turkish companies or banks being unable to meet debt obligations, he said.

“There is no immediate risk of a full-fledged financial crisis but the risk has increased recently,” Markov said.

Turkey has about $170 billion of external debt coming due this year. It has ruled out a loan programme with the International Monetary Fund as a means to bolster its finances.