As the pound fluctuates, some foreign banks revise or reduce their exposure to Turkey – sources

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DUBAI (Reuters) – Some foreign banks are revising limits on dollar lending to Turkish companies amid the pound’s crazy swings, two banking sources said, a move that could push borrowing costs up if foreign lenders cut.

FILE PHOTO: A bureau de change holds Turkish Lira and US dollar banknotes at a bureau de change in Ankara, Turkey December 16, 2021. REUTERS / Cagla Gurdogan / File Photo

At least two foreign banks have also pulled out of the lira’s spot trade, sources separate from the banks said, potentially limiting local businesses’ access to foreign currency and hampering foreign investment.

The lira has been on a rollercoaster ride since September, when Turkish President Tayyip Erdogan called for an interest rate cut.

On Monday, it plunged 10% to 18.4 per US dollar, bringing its losses for the year to almost 60%, before falling back to 12 after Erdogan unveiled a plan he said would guarantee the local currency deposits against market fluctuations.

Turkish banks are regular international borrowers, and the reluctance of foreign lenders to expose themselves to large currency fluctuations could make refinancing their debts more expensive and more difficult.

Fitch estimates that Turkish lenders’ foreign liabilities – mostly short-term and held by large international banks – were equivalent to 22% of their funding at the end of June.

Total external debt of Turkish banks stood at $ 138 billion at the end of the third quarter, of which $ 83 billion was due within 12 months, Fitch estimates.

Turkish banks rolled over their one-year foreign currency loans in October before the pound’s last fall, but could be affected during the next rollover period in the first quarter, a regional banker said.

“We had a few banks who came to us and said they would revise the Turkish limits for the next rollover period depending on what kind of update they would get on the economy,” the banker said.

A second banking source said his bank had recently further limited its short-term business activities with Turkey after reducing its exposure to term loans.

“Every transaction must be approved by the risk department,” the source said.

The sources declined to be named due to the sensitivity of the matter.

A leading Turkish banker said on Tuesday he was unaware that his foreign counterparts were reviewing or reducing loans.

Turkish banks have long had access to foreign funding despite several stressful periods, said Lindsey Liddell, Turkish bank rating manager at Fitch.

Fourth quarter syndicated loan renewals were less expensive than in the first half of 2021, with rollover rates remaining well above 100%, despite market volatility, she said.

“Nonetheless, foreign currency liquidity could come under pressure from a prolonged market shutdown or large outflows of foreign currency deposits,” Liddell said.

“Banks’ access to foreign currency liquidity has also become more dependent on the central bank and could be uncertain during times of market stress.”

The first banker said that some Turkish companies had also asked for an easing of the terms of their loan agreements due to the market turmoil, without providing details.

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Erdogan’s push to cut interest rates by 500 basis points since September sparked Turkey’s worst currency crisis in two decades, with the pound collapsing nearly 40% in just five weeks until last Friday.

Bid-ask spreads on the lira, a measure of the currency’s ease of trading, have widened sharply in recent days, with quotes approaching their widest in about a month.

Another sign of declining investor confidence, the pound’s implied volatility – or expected price swings – hit its highest level ever as the pound fluctuated wildly.

A major European bank and an Asian bank said they had halted cash transactions in lire and were extremely cautious about the liquidity supply for futures, citing market volatility and political risks. They also declined to be named due to the sensitivity of the issue.

JPMorgan withdrew from offering algorithmic trading facilities in the pound, according to a notice seen by Reuters late last week when the market collapsed. The US bank did not immediately respond to a request for comment.

John Marley, managing director of the consultancy forexxtra, said some banks were likely to switch to a system in which they would only execute trades if they had another client trade to clear it, meaning they would not. themselves take no direct risk.

“The last thing in the world you need is a little position in the pound that puts a hole in your annual statement,” he said.

Still, for Sergey Dergachev, senior portfolio manager at Union Investment, the currency crisis is unlikely to trigger defaults on international bonds of Turkish companies, in part because they refinanced 2022 maturities earlier this year. .

“Most of the issuers are also exporters and operationally benefit from the lower levels of the pound and a severe deterioration in credit (…)