"They Don't Have Enough": How Turkey Is Misrepresenting Its FX Reserves By 100%

Three weeks ago, when Turkey was scrambling to defend the lira ahead of local municipal elections, a potentially destabilizing event which saw significant selling of the currency (and which ended up badly for Erdogan's ruling AKP party, which lost control of the two most important cities, Ankara and Istanbul), we reported that the Turkish central bank had burnt through at least a third of its foreign reserves in March in an effort to stem a plunge in the lira, in a repeat of the crisis that engulfed the lira last summer and triggered a blast of inflation and the first recession in a decade, and was "putting the country on path to a full-blown currency and funding crisis."

And despite what was a clear, continued central bank defense of the Turkish lira since then, Turkey's official reserves actually appeared to rise, in what was meant to telegraph confidence in the currency and give the impression that the currency was stable without continued central bank support.

There was just one problem: the central bank appears to have been if not lying, then grossly misrepresenting the true state of the country's foreign reserves .

As it turns out, Turkey has been pulling a financial trick popularized by China's central bank for the past several years, and according to the FT, the country's central bank was propping up its foreign currency reserves with billions of dollars of short-term borrowed money, "raising fears among analysts and investors that the country is overstating its ability to defend itself in a fresh lira crisis."

After tumbling from a recent high of $34 billion to $25 billion at the end of March, Turkey reported that the net foreign reserves held by the central bank stood at $28.1 billion in early April — a sum which the FT notes was already believed to be inadequate because of Turkey’s heavy need for dollars to cover debt and foreign trade. But what the Financial Times uncovered is that this total was "enhanced" by a surge in the use of swaps, or short-term borrowings, since March 25. Stripping those swaps out, the total is an alarmingly low $16 billion, an amount which could be depleted in just months, if not weeks, especially if the news of the CB's plunging reserves creates a self-fulfilling prophecy in which lira holders rush to convert their currency before the central banks runs out of dollars.

The chart below shows two sets of numbers: Turkey's true net foreign reserves, and the number that the central bank had used for public consumption, which includes the nominal amount of swaps.

https://www.zerohedge.com/news/2019-04-17/they-dont-have-enough-how-turkey-misrepresenting-its-fx-reserves-100