Turkey’s central bank has received an additional $10 billion in financial support from Qatar in the form of cross-currency swaps.
Expectations had intensified in recent weeks that Turkey, seeking a pile of hard cash to help deal with the COVID-19 outbreak and bolster its dwindling foreign currency reserves, would secure much-needed swap lines from abroad, alleviating pressure on the embattled lira.
But the reaction to news of the deal with Qatar – Turkey’s closest regional ally – was surprisingly muted. The lira, already off an all-time low of 7.269 per dollar reached on May 7, was little moved, continuing to trade down against the U.S. currency on Wednesday afternoon.
While the Qatari rial may not carry the financial weight of the U.S. dollar or euro, it is still ‘harder currency’ than the lira, which has a long record of steep depreciation and volatility.
Chronic inflation and financial crises in Turkey during the 1980s and 1990s meant that you needed millions of liras to buy a dollar before the government lopped six zeroes off the currency in 2005. Just prior to the global financial crisis of 2008, the lira had briefly traded at 1.15 per dollar, helped higher by surging direct foreign investment and portfolio inflows from abroad.
When news broke of an initial $3 billion in swaps from Qatar in August 2018, included in a wider $15 billion package of investment, the lira reacted positively. The cash pledge helped the currency recover from a deep crisis that had broken out days earlier. Economists and investors such as Charles Robertson at Renaissance Capital in London welcomed the deal, saying the cash was quick and accessible.
So why the muted reaction today? Timothy Ash, a senior emerging markets strategist at BlueBay Asset Management in London, suggested that the extra $10 billion may merely constitute cash left unspent from the original 2008 agreement. The countries’ two central banks had agreed to increase the swap lines to $5 billion in November 2019, leaving $10 billion spare.
The cash is also coming from a country with questionable international standing. Qatar has been ostracised by regional powers such as Saudi Arabia and many Western politicians see developing relations with the kingdom as an unnecessary risk. Therefore, the arrival of the money is hardly a resounding win for a country looking for financial support from central banks elsewhere too.
What Turkey really needs is backing from the West.
But the U.S. Federal Reserve has already rejected an application from Ankara for swap lines, reportedly fearing that such support for Turkey, with its questionable record of economic and financial management, might set a precedent.
There is also the small matter of Turkey, a member of NATO, taking delivery of S-400 air defence missiles from Russia last year. U.S. legislators are still considering economic sanctions in response. And then we have the alleged involvement of senior Turkish politicians in a sanctions-busting scheme with Iran. The Turkish state-run Halkbank has been charged by U.S. prosecutors with complicity.
The reaction in the currency markets was very different earlier this week when news broke that Turkey’s central bank was reportedly very close to securing a total of $20 billion in swaps from the Britain and Japan. The lira jumped more than 1 percent in response, hitting its highest level in a month.
Securing funds from London and Tokyo would represent a positive turnaround in perceptions concerning Turkey’s relations with traditional global powers. At the core of Turkey’s economic and financial travails has been its increasing distance from the West, which has turned into a self-fulfilling prophecy because of the resurgent regional ambitions of the country under the leadership of President Recep Tayyip Erdoğan.
As Erdoğan’s regional standing has grown, so has his vilification of Western governments and financial institutions, most recently for the latter’s alleged role in a scheme to damage the country’s economy through the currency markets.
Turkey’s banking regulator banned Citigroup Inc., Swiss bank UBS and French lender BNP Paribas from trading in the lira for four days earlier in May. An investigation against the companies continues.
Erdoğan has ruled out a new loan agreement with the International Monetary Fund to help Turkey through COVID-19, or even IMF cash that would require little or no economic reform, saying the institution is a tool of the West to maintain its global dominance. The days of Turkey’s reliance on the IMF are now over, the president maintains.
The European Central Bank has also reportedly rejected a request by Turkey for swap lines in euros. This is hardly surprising as Turkey’s relations with Europe have become fraught with tensions, particularly since a failed military coup in 2016 which provided a springboard for Erdoğan to crack down on his political opponents. The state of those ties now stands in stark contrast to the pre-2008 period, when Turkey began membership talks with the bloc and was implementing long-awaited democratic reforms.
In this strategic backdrop, largely of its own making, Turkey is being forced to look away from its traditional allies in the United States and Europe. But other G-7 countries are unlikely to come forward either.
A swap deal with Britain looks like a long shot. Prime Minister Boris Johnson may see the benefits of providing Turkey with capital as his government seeks alternative destinations for British goods and investment post-EU membership. But Britain has the second-highest death toll globally from COVID-19 after the United States, so selling such an agreement to the U.K. electorate would be fraught with political risk.
Japan has developed strong economic ties with Turkey under Erdoğan. Several of its largest companies are involved in construction projects in the country. But again a currency swap arrangement looks unlikely. Japan’s relations with Europe and the United States are still far strong than with Turkey.
Rather, Japan may provide direct loans to Turkey, most likely with the intention to finance ongoing and new investment projects in Istanbul and elsewhere in the country, according to sources.
So, it appears Turkey’s central bank, with its dwindling foreign currency reserves, is stuck with Qatar and the Qatari rial for the foreseeable future. The situation is unlikely to change for the foreseeable future.