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Dec 13 2018

Turkey playing ‘dangerous game’ to lower interest rates, economist says

For the second month in a row, the Turkish treasury is using indirect ways to borrow at lower interest rates, a tactic that could backfire and pave the way for ultra-high borrowing costs instead, economist Uğur Gürses said in his blog on Thursday.

In November, the Turkish treasury cancelled three of the seven auctions planned during the month. In three of the auctions on Nov. 12 and Nov. 13, the treasury borrowed a significantly lower amount than planned and only accepted bids with lower interest rates, Gürses said. He calculated the net difference between planned and realised domestic borrowing during the month at 14.5 billion liras ($2.7 billion). 

But the treasury needed 13.9 billion liras ($2.5 billion) to make scheduled repayments to the market and public institutions, so it used some of the 27.6 billion lira ($5.1 billion) held in its deposit account with the central bank. Only 6.5 billion liras ($1.2 billion) was left over because the treasury also had to pay the salaries of public sector workers on Nov. 13, Gürses said. 

While the aim of the government’s unorthodox operation was to lower market interest rates, the Treasury only managed to cut them by 1.68 percentage points, said Gürses.

In an earlier blog in November, Gürses said two banks were involved in the operation.

“One inevitably thinks that; can the two banks that offered the lowest bids be state-owned banks? I mean, can the auction be ‘pre-planned’,” Gürses asked in the blog.  

According to Gürses, the treasury repeated the same operation this week. 

On the morning of Dec. 11, the date of the treasury’s latest domestic borrowing auction, the market rate was at 20.5-20.6 percent. Eight banks presented bids at the auction and the treasury borrowed from three. The lowest interest rate offered by them was 18.51 percent and the highest 18.62 percent.

“The banks attending the treasury’s auction and designated as primary dealers were presenting bids diverging from market rates in what some say was ‘against the ordinary course of life’,” Gürses said. 

“Ankara is playing a very dangerous game,” he said. “The borrowing strategy over the last month is: to borrow in foreign currency as much as possible, to borrow in Turkish lira as little as possible, and to keep the interest rates low through pressure.”

As a result, banks who ended up lending money at lower rates of interest will not lend money at average rates in the future, the economist said. Furthermore, the treasury’s operation has lowered rates somewhat but the trend will reverse in future auctions and everybody in Turkey will have to carry the burden, he said. 

In the treasury’s auctions, primary dealers have the advantage of offering separate non-competitive bids as well as buying debt in the regular auction sessions. Thirteen banks were designated as primary dealers for 2018, including three state-owned banks; Ziraat Bank, Halkbank, and Vakıfbank.