Turkey ends ban on three foreign banks in currency spat

Turkey has reversed a decision to ban several overseas banks from its currency market just days after it was introduced, the latest step in an unpredictable relationship with foreign lenders and investors.

The country’s financial regulator lifted the freeze on Monday after it last week claimed Citigroup, UBS and BNP Paribas had failed to settle their lira liabilities on time. The Banking Regulation and Supervision Agency said the liabilities had now been repaid, but added that “investigations into foreign banks that were late in fulfilling their obligations will continue”.

The scuffle is the latest incident in what some traders and analysts see as a series of mis-steps that have damaged Turkey’s appeal, but which the government says are crucial to support the economy through the Covid-19 crisis amid a barrage of lira-selling by foreign investors.

“The Turkish government has become a lot more abrasive with foreign banks,” said an executive at a large New York-based financial institution that is active in Turkey’s markets. He said the country was “slowly burning a lot of bridges”.

Last week’s ban came after the three banks purchased foreign currency from local lenders but did not pay the lira at the other end of the transaction “in time”, Mehmet Ali Akben, head of Turkey’s financial regulator said in an interview on Sunday with the state-run Anadolu Agency. This broke regulations announced last week to stop “manipulative initiatives that threaten the financial system”, he said.

This is not the first time Turkish authorities have taken unusual action against foreign banks during periods of currency weakness. The BRSA last year launched an investigation into JPMorgan after the Wall Street bank advised investors to short the lira during a similar time of tumult for the currency.

But one person familiar with the Turkish government’s discussions said the short ban simply reflected the fair application of local regulations. “All of the offshore banks should be aware that the rules have changed,” he said. “You may like it, you may dislike it. But these are the rules . . . Something had to be done.” BNP Paribas, UBS and Citi declined to comment.

An executive at a large foreign bank operating in Turkey, which was not involved in the regulatory action, said some foreign lenders were wrongfooted by abrupt regulatory changes in recent weeks that were part of a broader crackdown to make it more difficult for traders to make bets that the lira would fall.

Given the large volume of trade in various types of instruments, such as bonds or equities, all of which settle on different timeframes, it is common for foreign banks to either buy or sell lira from local counterparts to smooth out their accounts at the close of business.

One person familiar with this process described the sanctions by the Turkish government imposed on the trio of lenders as “entrapment”, since “it would be impossible for these banks not to require some lira funding on some days to settle trades”. He said the actions had made some market participants “extremely nervous”.

Ilan Solot, market strategist at Brown Brothers Harriman, called the censure of the three banks an act of “desperation” as authorities contended with a 16 per cent fall this year in the value of the lira against the US dollar.

These types of measures imposed on market participants would eventually increase the cost of doing business in Turkey, and reduce the incentives for investing in the country, said Per Hammarlund, an emerging markets strategist at SEB.

Turkey has cut interest rates several times to help support the economy through the coronavirus crisis, and also used up large chunks of its foreign currency reserves to try and protect the lira. But many investors and analysts remain nervous about the currency’s prospects.

Goldman Sachs warned at the weekend that the lira could fall further, hitting TL8.25 to the US dollar by this time next year, from TL7.08 now, citing concerns over “policy credibility”, falling foreign currency reserves and the coronavirus crisis.