Suspension of lira transactions by European banks hints at trouble to come

People walk on the deserted Istiklal Street in Istanbulss, during a four-day curfew to prevent the spread of the coronavirus epidemic. (AFP)
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Updated 19 May 2020

Suspension of lira transactions by European banks hints at trouble to come

  • Move comes after Ankara temporarily imposed similar bans on UBS, BNP Paribas and Citigroup

JEDDAH: Luxembourg-based Clearstream Banking and Belgium-based Euroclear Bank have jointly decided to suspend Turkish lira transactions over a shared electronic communications platform.

The decision is effective from May 18, according to a statement posted on Clearstream’s website.

The reason for the move was related to the liquidity restrictions on the lira due to the current coronavirus pandemic, Clearstream said in the statement. However, it recommended that its customers should maintain a buffer amount in their cash accounts in lira, and that they should monitor their securities settlements, trading on the Borsa Istanbul (Istanbul Stock Exchange) and cash transfer activity to prevent any failed transactions.

Orkun Saka, visiting fellow at London School of Economics and assistant professor of finance at University of Sussex, said it was not a good sign for international investors.

“However, it also depends on why these investors transact with Turkish financial markets. If the speculative players who simply trade Turkish lira to make profit from a possible crisis situation are discouraged by ‘sand in the wheels’ policies, it is not too bad for Turkey,” he told Arab News.

“On the other hand, if these regulations become permanent and start scaring investors who have productive capacity and intentions in the country, this could translate into a huge loss in the long term,” he added. Experts say the decision will make it more difficult for foreign investors to obtain and make transactions in lira. It is also a sign that the convertibility of Turkish lira might be at risk. Some financial analysts have also drawn attention to the possibility that Turkey might begin introducing capital controls to deflect the lira’s weakness, which would discourage external financing of the national economy.

The currency hit an all-time record low of 7.2 lira per US dollar on May 7.

On the same day, Turkish authorities introduced a transaction ban on BNP Paribas, Citigroup and UBS — a controversial move that was lifted after four days once they had all satisfied their liabilities with local banks.

The concerns over “speculative attacks” on the currency remain very fresh in the minds of Turkish officials.

Pro-government media accused unknown financial institutions of currency manipulation, while Turkish state-owned banks reportedly sold significant amounts of foreign currency recently in their battle to defend the currency against the dollar.

Last week, Turkish President Recep Tayyip Erdogan blamed the lira’s plunge on “those who think they can destroy our economy and corner us by exploiting financial institutions abroad.”

The volume of trading in lira has plummeted considerably as other foreign banks suspected further measures might be taken against them. For Saka, the recent ban on three foreign banks was a sign that Ankara will bring more regulations on capital flows to continue prioritizing a stable currency and low interest rates in the future.

“This will restrict the behavior of international investors bringing money in and out of the country. So far, the government has been temporarily applying these defense mechanisms to fend off speculation, but there is a risk that these may turn into permanent features of the Turkish financial markets,” he said.

In the meantime, the Turkish government is searching for funding from its allies to avoid a new currency crisis, similar to that of 2018, which increased unemployment and inflation rates.

Establishing currency swap lines with Japan and the UK, and expanding current facilities with China and Qatar, are reportedly on the table.

The government has also brought in stricter limits on local banks’ FX trading.

Saka noted that intervention policies, such as those applied by Turkey in 2018, are meant to be short-term, and that strict interventions are usually abandoned a few years after a crisis. “Let’s hope this will be the case for Turkey too,” he said.

European bank ramps up stimulus package

Updated 05 June 2020

European bank ramps up stimulus package

FRANKFURT: The European Central Bank approved a bigger-than-expected expansion of its stimulus package on Thursday to prop up an economy plunged by the coronavirus pandemic into its worst recession since World War II.

Just months after a first raft of crisis measures, the ECB said it would raise bond purchases by €600 billion ($674 billion) to €1.35 trillion and that purchases would run at least until end-June 2021, six months longer than first planned.

It also said it would reinvest proceeds from maturing bonds in its pandemic emergency purchase scheme at least until the end of 2022.

ECB President Christine Lagarde scotched speculation that the bank could follow the US Federal Reserve in buying sub-investment grade bonds, saying that option was not discussed by policymakers.

The announcement, which comes just weeks after Germany’s Constitutional Court ruled that the ECB had already been exceeding its mandate with a longstanding asset purchase program, prompted a rally in the euro and bond markets.

“Today’s easing measures were another illustration that the ECB means business and stands ready to do whatever is necessary to help the euro area survive the corona crisis in one piece. The ECB will do its part, and it hopes the governments will do their part,” Nordea analysts said in a note.

The bank dramatically revised downward its baseline scenario for euro zone output this year to a contraction of 8.7 percent from the modest 0.8 percent rise it had forecast only in March.

“The euro area economy is experiencing an unprecedented contraction. There has been an abrupt drop in economic activity as a result of the coronavirus pandemic and the measures taken to contain it,” Lagarde said.

She said she was confident that a “good solution” could be found on the legal stand-off with Germany’s top court.