Foreign investors exchange their dollars and euros with Turkish liras held by local banks through forward agreements to take directional bets on the currency, as well as to hedge their exposure to the country. So when the Banking Regulation and Supervision Agency (BDDK) capped local lenders’ swap and swap-like transactions to just 25% of shareholder equity on Wednesday, liquidity began to dry up, rates surged and many investors had little option but to offload their holdings.
The Turkish lira has effectively become “untradeable”, David Riley, chief investment strategist at BlueBay Asset Management, said in an interview on Bloomberg Television.
The currency fell Friday as the prospects of further US sanctions and downgrades by S&P Global Ratings and Moody’s Investors Service spurred uneasiness before Turkish markets close for a weeklong public holiday. As things stand, the fear is that there is little investors can do to protect themselves from the turbulence.
“Offshore investors with lira assets will be faced with a difficult question,” said Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul. “Either to close their lira position, convert to dollars and exit, or to continue bearing lira risk. In the absence of an improvement in US-Turkey relations or a credible economic programme, we think the outflows will accelerate.”