The repression of short selling invades the Turkish money markets


The day-to-day Turkish lending cost more than tripled on Wednesday, exceeding 1,000%, reflecting the way the money markets have seized after an apparent bid to thwart foreign short sellers.

The offshore swap rate, the cost for foreign exchange investors to read, rose to 1,200%, after reaching 325%, the highest level since 2001 in the previous session. It was 22.6% at the end of last week, show Refinitiv data.

Rising costs highlight what some analysts see as an attempt by the Turkish government to halt a drop in the lira, after the currency had its sharpest fall since the economic crisis of the summer of 2018. It has increased Monday and Tuesday this week. . On Wednesday, it fell several times by 2% before resuming several times – an unusual trend that suggests a systematic purchase. "It's hard to exaggerate the stress," said a Turkish specialist from a European bank in London.

Another London-based analyst, who asked not to be named, said Tuesday that Turkish banks had told him that it had been ordered them to "not lend even a single lira to foreign counterparties".

Turkish equity and equity markets also showed signs of growing investor fear. A 10-year dollar government bond maturing in October 2028 was trading with a return of 7.63% on Wednesday, up from about 7% at the beginning of last week.

Lira-denominated paper also experienced lower prices, leading to higher yields. The 10-year benchmark return was 18.1% on Wednesday, after reaching 13.8% at the end of January.

The cost of hedging a Turkish debt default over a five-year period with the help of credit default swaps went from 352 basis points to 453 basis points at the end of the last week.

At the same time, the Borsa Istanbul 100 benchmark dropped 5% on Wednesday, leaving it down 10.3% over the past two weeks.

Esther Law, head of emerging market debt management at Amundi, said the measures to limit short selling were "tactical support" to read it, but warned, "It will not solve the problems and will certainly not help the local market. "

Another emerging market investor added that "by apparently eliminating the offshore swap market, foreigners can not easily hedge their lira bond positions."

"It's pulling them in the foot again," he said.

The investigation opened by the Turkish authorities on JPMorgan over the weekend, after the investment bank issued a bearish report on the read, also largely dried up the flow of research, according to investors, creating a headache for some managers who use these reports. "I would prefer not to talk about Turkey. We do not have the right to talk about this for the moment and I'm sure you hear the same thing from other banks, "said a generally talkative analyst from a European bank.

The recent period of market volatility comes a few days before crucial local elections scheduled for Sunday. Turkish President Recep Tayyip Erdogan runs the risk of losing control of Ankara, the country's capital, and Istanbul, his largest city.

The sharp currency fluctuations have added another economic concern to the Turks, who are facing glaring inflation and a marked economic slowdown.

Also on the political front, the Turkish Foreign Ministry announced that Russian Foreign Minister Sergei Lavrov will travel to Antalya, a Turkish coastal city, on Friday to meet his Turkish counterpart, Mevlut Cavusoglu.

The two men are likely to discuss Ankara's plan to acquire a Russian S-400 air defense system in Moscow. Growing tensions between the United States and Turkey over the acquisition have discouraged investors, who fear Washington will impose sanctions on Turkey, a NATO member, if it proceeds with the purchase.

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