LONDON (Reuters) – Turkish one-week lira FX swaps jumped to as much as 20.25% on Wednesday, as measures by authorities to limit market volatility revived memories of the squeeze international lira trading went through in March.
The leap in the swaps rates tested two-and-a-half-month highs as dealers reported that, just as they had in March, some local banks had been advised not to lend lira to overseas counterparts.
Wednesday’s move was nowhere near as extreme. The squeeze then sent the cost of lira borrowing in swaps markets soaring past 1,000%.
This time, traders said there was no blanket freeze on lira lending from domestic Turkish banks.
“It reads like a warning that if the lira sells off again that the liquidity could be squeezed,” said TD Securities emerging market strategist Izidor Flajsman.
On Tuesday, U.S. prosecutors charged Turkish state lender Halkbank (IS:) with taking part in a multibillion-dollar scheme to evade U.S. sanctions on Iran. In response, the bank’s shares plunged.
“Offshore” currency and swap markets are widely used because they are typically freer of central bank influence than domestic markets and international institutions generally find it easier to get credit lines with bigger banks.
But they are still vulnerable to the ebb and flow of local currency liquidity. And this — as March showed — is where authorities do retain an element of control.
Just by shutting off its funding auctions for a while and maybe doing a bit of behind-the-scenes leaning on the local lenders, the central bank could spike the swap rates and briefly seize the market.
“We see that Turkish banks’ tendency to supply lira to the swap market has fallen below the legal limit in recent days,” said one senior Turkish market banker who requested anonymity.
At the end of March, lira supply to this market by Turkish banks was reduced to zero, excluding outstanding transactions, the banker said. “We can’t say today that it has been reduced to zero, but we see a serious decline.”
Foreign banks and investors had put in measures to protect themselves from those kind of actions after being hit hard earlier in the year, the banker added.
Turkey’s BDDK regulator did not immediately comment on the lira moves.
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