"They Don't Have Enough": How Turkey Is Misrepresenting Its FX Reserves By 100%
(edit for space)
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."
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 PBOC 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.
To be sure, the Turkish currency market has been a shitshow for the past month: at the end of March, just days ahead of the elections, Turkey pulled another popular Chinese trick, when in an attempt to crush speculators and lira shorts, it briefly pushed up its overnight swap rates to 1350%, a level which resulted in swift condemnation from the international finance community which was furious at the ridiculous tricks pulled by the Erdogan government, as it instantly locked up the local financial system making international currency transfers impossible.
Then, once the central bank realized it couldn't keep swap rates at stratospheric levels for long, it decided to change its approach, and opted to lie about its reserve situation instead. So, starting roughly around the time the overnight swap rate collapsed back to normal on March 28.
What exactly are these swaps? Stated simply, this is money that Turkey borrowed from the country's commercial banks, which just so happens, are flush with dollars after individuals and companies flocked to hard currency as a haven.
For those following the fund flows, this circular arrangement was a delightfully Machiavellian construct by Erdogan: first, as a result of its collapsing reserves, the central bank prompted fears among the local population that its funding situation was unsustainable, forcing a surge in lira to dollar conversions among the local population (and foreign speculators). However, since the dollars that were received following the conversion were parked with the local banks, the central bank had easy access to use them - in the form of swaps - and as it received more dollars from the commercial banks, it not only could defend the lira further, using the people's money against them, but also misrepresent the true level of its net foreign reserves!
The bottom line is that they don’t have enough, whether it’s net or gross,” Ash added. "Everyone in the market knows that Turkey doesn’t have enough foreign currency reserves to mount a sustained and credible defence of the lira."
The only question is when will the price of the lira, which at the current level of 5.75 vs the dollar is wildly overvalued, start reflecting Turkey's dismal situation.
https://www.zerohedge.com/news/2019-04-17/they-dont-have-enough-how-turkey-misrepresenting-its-fx-reserves-100
(First China and now Turkey- No coincidences here!)