The European Bank for Reconstruction and Development and the International Finance Corp will likely extend more lira loans to Turkish companies after the government exempted such institutions from restrictions on swapping foreign exchange for the local currency.
The banking regulator’s decision to allow international development banks to conduct lira swaps may decrease their cost of funding because rates in the local market have been below those in London since the introduction of the swap restrictions, according to people familiar with the matter.
The transactions are allowed on condition the lenders invest in Turkish assets and extend credit to local firms. The move will likely increase the share of lira loans for the two development banks, the people said, speaking on condition of anonymity.
“We welcome the banking regulator announcement to allow international development banks such as the EBRD to access lira liquidity,” said Arvid Tuerkner, head of the lender’s operations in Istanbul. “We look forward to testing the new mechanism, which we hope will provide the EBRD with reliable on-shore access to Turkish lira.”
The IFC, the private-lending arm of the World Bank, declined to comment.
The regulator’s decision, published late July, gave the green light to global development banks to buy liras in the Borsa Istanbul foreign-exchange swap market, conduct repurchase and reverse repo transactions, and engage in lira deposit operations with local banks.
To deter short sellers, foreign investors have essentially been barred from borrowing from local banks and don’t have access to the Turkish central bank’s funding. That means those without liras on hand have to borrow the currency in the offshore market – where supply is limited – driving up the cost of money.
The rate of borrowing Turkish liras overnight in the offshore market jumped as much as 1,020 percentage points to 1,050% on Tuesday as dollar sales executed by state banks, designed to prop up the lira, drained the supply of local currency. As a result, several international banks failed to close their lira positions with Turkish counterparts, according to people familiar with the matter.
“In difficult times, the right financing mix, including the local currency, is critical for Turkish businesses,” Tuerkner said. “In the past three years, about one-third of EBRD annual financing for Turkish companies was provided in lira.”
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