BNP BNP Paribas

By Avantika Chilkoti and Caitlin Ostroff 

Turkey blocked three international banks from trading its currency Thursday, an effort to stymie investors who are betting that the country's weak financial standing will continue to deteriorate.

Turkey's banking regulator said units of Citigroup Inc., BNP Paribas SA and UBS Group AG can no longer process transactions involving Turkish lira. It determined that the lenders had failed to fulfill their liabilities in Turkish lira transactions with Turkish banks. The watchdog didn't say how long the ban would remain in force.

All three banks are international players in foreign-exchange markets, helping investors and companies trade into and out of the currencies, including the lira. The ban was issued hours after a new regulation that gave the banking regulator, known as the BDDK, increased powers to prosecute alleged market manipulation and the publication of misleading information.

Representatives at UBS and BNP Paribas didn't immediately respond to requests for comment. Citigroup declined to comment.

The Turkish currency hit a record low against the dollar earlier Thursday before bouncing back slightly after the trading ban was imposed. One U.S. dollar bought 7.1 lira, leaving the Turkish currency up 1% for the day, but 20% weaker than at the start of the year.

The slide in the lira reflects a troubling backdrop for the Turkish economy. Heavily indebted and struggling for years to contain high inflation, Turkey is now dealing with the impact of the coronavirus both at home and in its biggest trading partner, the European Union.

Banning foreign banks from trading the lira "sends a signal of desperation," said Brad Setser, a senior fellow at the Council on Foreign Relations. "The central bank has on one hand been unwilling to adjust interest rates -- the classic defense of the lira -- and on another hand has a reduced capacity to intervene directly in the foreign-exchange market."

The country's central bank has all but run out of foreign-currency reserves and recently sounded out the U.S. about setting up a swap line to borrow dollars, similar to ones offered to countries such as Brazil and Norway. Analysts say such an offer is unlikely to materialize, given Turkey has no reserves, limited trade with the U.S. and a fraught political relationship with Washington.

President Recep Tayyip Erdogan in the past has refused to go to the International Monetary Fund, which would require the country to institute reforms in exchange for aid. Members of his administration have explained that it would be a sign of weakness, which would risk undermining the 66-year-old president's political standing at home.

Seeking to revive growth after a 2018 currency crisis, the Turkish central bank has slashed its lending rate to 8.75% from 24% over the past 10 months. The lowering of the rate, meant to boost domestic lending, reduced the attractiveness of holding the currency. Foreign investors have raised a red flag around central-bank independence since Mr. Erdogan ousted the previous central-bank governor last year.

As the lira falls, it becomes harder for the country's banks to pay back substantial foreign-currency debts. Turkey's banks have $79 billion of short-term foreign-currency debt due by February 2021, according to data from Turkey's central bank.

"If they go at the pace they're going, the endgame is that they head into a balance-of-payments crisis," said Nafez Zouk at Oxford Economics.

The ban on the three banks may not be effective at leveling out the lira, since it removes players from the market, said Filippo Alloatti, senior credit analyst, international at Federated Hermes.

"The cost of liquidity increases because you have less counterparties you can deal with, so it is not a very efficient way to shore up the currency in the short term," he said.

Turkey has long had a love-hate relationship with foreign investors. In 2019, during a sharp slide in the lira, it directed state banks to raise borrowing costs and limit the ability of foreigners to bet against the currency.

Because it runs a current-account deficit, importing far more than it exports, Turkey relies on foreign money to keep the economy afloat. Foreign banks have played that role, lining up investors to buy Turkish bonds, lend to its banks or make currency trades that take advantage of Turkey's relatively high interest rates.

In an ironic turn, a day before being banned, Citigroup helped organize a conference call for investors with Turkey's finance minister, Berat Albayrak. Mr. Albayrak, who is who is also Mr. Erdogan's son-in-law, used the call to reassure investors about Turkey's financial position, according to people familiar with the call.

--David Gauthier-Villars contributed to this article.

(END) Dow Jones Newswires

May 07, 2020 14:26 ET (18:26 GMT)

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