Turkish finance chiefs warn banks of the risks of borrowing dollars
Few currencies around the globe are quoted in millions against the dollar. But fewer still can have lost half their value against the world’s major currencies and regained 25 percent of it all within a year. Turkey’s policy-makers were worried by the lira’s unprecedented slide in the eight months leading up to last October. Now they are even more worried by their currency’s risky rise against the dollar. What’s wrong with the lira recovering? Quite a few things, in a country where the whole financial system collapsed twice in eight years because of banks’ excessive foreign currency exposures. Turkish banks seem to have a bad memory and not to learn their lessons. They need to remember February 2001, if April 1994 is too remote to recall. As the lira rose to a nine-month high of 1.292 million to the dollar last week, two of the country’s most powerful financial figures felt they had to sound a warning. In spontaneous but separate statements, Central Bank Governor Sureyya Serdengecti and bank watchdog chief Engin Akcakoca warned banks that borrowing dollars excessively to invest in high real lira interest rates was «risky and unwise.» But why risky and unwise? The answer, perhaps, is signs that banks were increasing their foreign currency exposures in a worrying echo of the situation before last year’s financial meltdown. The move by the two monetary bigwigs was apparently intended to scare the banks. It came only a day after Kemal Dervis, the economy minister, warned «foreign currency speculators» that they might burn their fingers. But short-term positions will probably continue to expand at least until after the summer. Although punishment will follow if Turkish banks open positions that exceed their limits, they have been borrowing foreign currency abroad to invest in high-yield government paper denominated in the local currency. This is a delicious but dangerous recipe responsible for the collapse of more than 20 Turkish banks since 1994. A crash in the value of the lira in 1994 and in 2001 left many banks unsuccessfully struggling to cover their exposure. Everyone agrees the lira is overvalued. Although lira/dollar parity has risen by 88 percent since February 2001, the average consumer/wholesale price inflation has also risen by 87.5 percent since then. That means the lira, in real terms, has only just depreciated against the US currency since the start of the most recent financial collapse. But why is one of the world’s most unstable currencies overvalued? Because it is one of the world’s most unstable currencies would be the simple answer. Forex traders and investors, however, cite increasing market confidence. They say there are now better prospects of Turkey cutting consumer price inflation to 35 percent by year-end from the current 65 percent. Market expectations, too, are better. A Central Bank survey has shown the forecast for year-end consumer price inflation falling to 39.1 percent from 43.6 percent two weeks earlier. But the relative slowdown in inflation is a mere outcome of recession. Weak consumer spending in an economy that shrank 9.4 percent last year obviously slows price rises. The real explanation for the lira’s recovery, however, is a mixture of psychological and technical factors. The Turks traditionally rush to buy dollars during a lira slide, therefore further sparking the slide, and sell dollars when the lira is stronger. In other words, their buy/sell moves are shaped by «recent exchange rates.» Fearing further dollar decline, individual traders have been dumping their dollar portfolios to avoid larger losses. Technically speaking, dollar demand is weak because (a) banks are selling dollars to invest in lucrative government papers (at last week’s t-bill auction, banks bid twice as much as the actual paper sold), (b) individuals and companies are selling dollars to take advantage of high bank deposit rates, which they anticipate will drop in the months ahead in line with slower inflation, and (c) price makers anticipate lower rates of inflation especially during the summer. Turkish banks have returned to an old and dangerous game. They must once again remember their bitter experience of temporary gains from trading foreign currency into high Turkish yields. The system is vulnerable to any concerted action by foreign investors to dump their Turkish portfolios due to their renewed risk assessment, as well as to an indirect government move against its own currency.
