Turkey’s central bank on March 31 launched three FX swap auctions worth $10bn with local lenders, according to media reports.

A $5bn one-week auction was announced as value-today (same day or T+0 settlement), while a $2.5bn one-week auction was value-tomorrow and a $2.5bn one-month auction was also value-tomorrow.

At the auctions, the central bank accepted $8.62bn of bids. In exchange, it absorbed Turkish lira (TRY) 367bn in liquidity from local lenders at a USD/TRY exchange rate of 44.48.

The value-today swaps worth $4.9bn are reflected in the official data set.

Table by @e507: Results of the central bank’s swap auctions held on March 31 and implied rates for longer maturities.

Identical rates, longer maturities

The implied lira interest rate in the auctions came in at 40%, in line with the current level of the central bank funding rate and market rates (TLREF).

Local banks will, meanwhile, benefit from longer term maturities compared to daily funding from the central bank and the interbank money market.

Another option for local lenders to access lira funding in exchange for dollars (when FX demand rises, they buy dollars to fix their currency risks) is the London offshore market.

However, foreign players have been closing their lira positions since the latest chapter in the US and Israel war with Iran was opened with missile strikes on February 28.

Lira scarcity

Since that day, Turkey’s central bank has sold more than $30bn to avoid a lira collapse amid similar portfolio outflows. In exchange, it absorbed lira held by local lenders.

Table: Between February 27 and March 20 (covering the first three weeks of the Iran war), Turkey faced $22bn worth of portfolio outflows, while Turks’ FX deposits showed little change.
 

Table: The net FX position of the Turkish central bank fell by $36bn in the first three weeks of the war. However, $9bn was ascribed to the gold price fall, suggesting net reserve sales of $28bn.

As a result of dollar sales, the central bank has once again created a dearth of lira in the banking system. The ‘lira’ in question here is central bank money, which is different from the currency used by non-bank economic actors. Details of the difference referred to are here.

Hard to believe, but no crisis yet

For the sake of managing its reserve liquidity, the central bank has also sold some of its gold reserves in addition to employing gold-to-dollar swaps on the London market.

The nosedive in gold prices has also created sharp declines in the central bank’s reserves.

The visible declines coupled with gold sales/swaps in addition to the revival of swaps with local banks and sales of lira-settled forward contracts to local banks may sound like a crisis.

However, the actual situation is still far from a crisis. It remains within the borders of reserves and liquidity management.

A reminder of the bad old days

In 2018, following the currency crisis, Turkey’s central bank launched derivative transactions to finance its interventions in the currency market.

At its November 2023 peak, the central bank’s open swap stock with local banks reached $64bn.

In June 2023, the current ‘orthodox’ economic management team took the wheel. Following the local elections held in March 2024, the central bank aggressively cut the volume of its derivatives stock, while building up its reserves thanks to portfolio inflows along with declines in FX deposits and increases in FX loans at local banks.

As a result, the swap stock with local banks declined from $58bn at end-March 2024 to zero as of July 31, 2024.

Moreover, the central bank on August 2, 2024 introduced reverse swap auctions (at spot, banks deposit lira at the central bank in exchange for FX and gold) as a new sterilisation tool.

As of March 30, the central bank’s open reverse swap stock with local lenders (made up of only gold swaps) stood at $1.71bn.