Several international banks failed to close their positions with Turkish counterparts on Tuesday, an outcome of policies that are keeping a lid on local-currency liquidity offshore, according to people familiar with the matter.
Foreign lenders were unable to meet lira obligations as the cost of borrowing in the currency jumped as high as 1,050% for offshore investors, the people said, asking not to be identified discussing sensitive information.
The banks’ failure is reminiscent of previous dislocations in the offshore lira market, where regulators have engineered a lasting liquidity crunch since August 2018 to prevent a disorderly depreciation in the currency. That resulted in several settlement failures similar to Tuesday’s, and as a consequence Turkish regulators temporarily banned local lenders from trading with Citigroup Inc (NYSE:)., UBS Group AG (SIX:) and BNP Paribas (OTC:).
A person familiar with policy makers’ thinking said regulators were unlikely to impose fines over Tuesday’s settlement failures. Turkey’s banking regulator declined to comment.
The supply squeeze this time was a result of heavy interventions last week. Dollar sales executed by state banks to prop up the lira began to settle after a public holiday, draining the supply of local currency and pushing the overnight borrowing rate in the offshore market to its highest level in 17 months.
To deter short sellers, foreign investors have essentially been barred from borrowing from local banks and don’t have access to Turkish central bank funding. As a result, those without liras on hand have to borrow the currency in the offshore market — where supply is limited — driving up the rate.
The lira weakened more than 14% against the U.S. currency this year, defying efforts by state lenders and breaching the psychologically important level of 7 per dollar on Wednesday.
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