The false pretenses of the Turkish lira following a new lending ban which is expected to affect thousands of businesses

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A money changer holds Turkish lira and US dollar banknotes at a currency exchange office in Ankara, Turkey, December 16, 2021.

Cagla Gurdogan | Reuters

Turkey’s currency, the lira, got a much-appreciated boost on Monday and the previous Friday after the country’s banking regulator announced a ban on lira lending to companies holding what it considered too much currency foreign.

On Monday morning in Istanbul, the lira had gained about 8% in two days, trading at 16.01 for the greenback, against Thursday’s close at 17.35.

But by late Monday afternoon, it had pared some of those gains, declining slightly to 16.5 against the dollar, after hovering between 16 and 17 liras to the dollar.

The moves reflect mixed feelings from investors about the new lending ban, which states that if Turkish businesses want to obtain commercial loans in pounds, they must sell enough of their currencies to buy pounds instead. which helps support the beleaguered currency that is being lost. nearly half its value over the past year.

The new rule states that companies holding the equivalent of 15 million lira in foreign currency (about $910,000 as of 3 p.m. Istanbul) cannot borrow lira if their foreign currency funds exceed 10% of their assets or annual sales. An exception for small businesses that cannot borrow in foreign currency allows them to borrow liras as long as their foreign currency position is net short.

The new rule aims to bolster the lira, which has weakened significantly in recent years after Turkey’s central bank, at the behest of President Recep Tayyip Erdogan, largely refused to raise interest rates to curb the rise of inflation. Today, for the country of 84 million people, inflation has reached a staggering 73%, severely crippling the purchasing power of Turks.

A man sells slippers at Eminonu on May 5, 2022 in Istanbul, Turkey. The country has grown rapidly for years, but President Erdogan has refused for years to raise rates significantly to calm the resulting inflation. The result was a plummeting Turkish Lira and much less purchasing power for the average Turk.

Burak Kara | Getty Images News | Getty Images

Turkey’s decision “potentially affects thousands of businesses”, Saxobank analysts wrote on Monday. “These companies may have an incentive to shed their foreign currency holdings if they want to continue accessing credit in TRY.”

Deutsche Bank wrote in a note that the rule’s impact will be “severe”, but the benefits for the lira could be short-lived after big companies reduce their foreign currency holdings.

Some analysts observing the change are unimpressed.

“Bad politics. Really desperate. Short-termism and actually capital controls, whichever way you look at it,” Timothy Ash, emerging markets strategist at Bluebay Asset Management, wrote in a note via email. mail.

“It complicates things too much for businesses and banks when everyone knows Turkey needs outright interest rate hikes.”

He added that any rise in the pound is unlikely to be sustainable and that the rule will not change demand for currency from Turkish businesses.

“Could give the pound a short-term boost, but doesn’t change the underlying story – arguably it makes it worse in the long term by driving trade and business underground and likely out of the system “, did he declare.

Ercan Erguzel, an economist at Barclays, says this poses a new risk to market liquidity, as Turkey is already running low on its foreign currency reserves.

“We may see additional pressure on the already tight system-wide FX liquidity,” he wrote in a note, adding that “in addition, some firms may consider delaying investments until ‘they have a better image in terms of their FX and TRY liquidity (read).

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