Turkey joins settlement house Euroclear after 8-year talks

Turkey is poised to join one of Europe’s largest securities depositories, allowing investors to settle trades in its government bonds, as it bids to attract more international capital at a time when foreign investment has hit a record low.

After about eight years of discussions the government has reached an agreement with Euroclear, the Belgian settlement house widely used by international investors to finalise their deals and safeguard collateral on their behalf.

The Brussels-based group holds more than €30tn of assets under custody on behalf of banks, asset managers and pension funds, and settled deals equivalent to €837tn last year.

Stephan Pouyat, Euroclear’s head of capital markets, said the agreement would open up Turkish debt to cautious investors such as sovereign wealth funds and pension funds, some of which invest only in markets that have an agreement with the depository.

“Those who are in our ecosystem who have a strategic intent to invest in Turkey, they will feel much more comfortable now,” he said.

The deal comes as many investors are steering clear of Turkey as they are wary of the country’s economic management under president Recep Tayyip Erdogan.

Non-resident holdings of lira-denominated government bonds dropped to just $7.1bn at the end of May, according to central bank data — the lowest level since records began in 2012. A 10-month interest rate-cutting drive by Turkey’s central bank has also proven to be a deterrent.

At the same time, investors have been alarmed by measures that Turkish authorities say are aimed at preventing “manipulative” behaviour in the country’s markets.

In May, Turkey briefly froze a trio of leading international banks out of its currency market, as it stepped up efforts to stop a wave of selling that sent the lira tumbling to a record low. Regulators have made it harder for portfolio managers to bet against the lira, by placing limits on the supply of the Turkish currency to most overseas financial institutions.

“Turkish monetary policy is unsustainable in the long run and we think there is a growing risk of capital controls,” said Viktor Szabo, a fund manager at Aberdeen Standard Investments. “We think it’s best not to have a position in Turkey at all.” The country’s shrinking presence in stock and bond indices also makes it easier for international investors to avoid, he noted.

Charles Robertson, chief economist at Renaissance Capital in London, said Turkey had become an irrelevance for many fund managers. “I just find it easier to encourage investors to look almost anywhere else,” he said.

A person familiar with the government’s negotiations with Euroclear acknowledged that Turkey was having a “rough patch” in terms of investor sentiment but said that the deal with Euroclear was “huge” for the country.

“It looks like a technicality but it’s really important,” the person said. “I know the market is not looking great at the moment . . . but things change very quickly. Now that we have the infrastructure, they will come eventually.”

In a statement, finance minister Berat Albayrak said the ability to “tap into the liquidity provided by international investors through Euroclear is important for the continued development of our local debt markets”.

Additional reporting by Adam Samson in London