UPDATE 2-As Turkish lira skids, Albayrak tells investors reserves are solid

(Adds comments from Fed policymaker, Turkish Treasury)

LONDON, May 6 (Reuters) - Turkey’s finance minister mounted a defence of Ankara’s policies on Wednesday in the face of a sharp lira selloff, telling investors their concerns about depleted currency reserves were misguided, and appearing to rule out capital controls.

On a conference call, Berat Albayrak said the central bank's FX buffer was more than adequate for now, according to participants and a readout from the ministry. Yet his comments did little to soothe investors' nerves as the lira fell further during the event.

Asked about the possibility of capital controls, he told the call that Turkey had never deviated from free market practices and any future policy measures would abide by this principle.

Albayrak, who is President Tayyip Erdogan’s son-in-law, also said he was optimistic about sealing a deal for a swap line for foreign currency funding, though he gave few details, several participants told Reuters after the call, which was closed to the press.

Turkey, heading for its second recession in less than two years, has asked the U.S. Federal Reserve and other central banks for access to funds as its own net currency reserves have fallen to nearly $25 billion from $40 billion so far this year.

Yet investors and economists fear that the cash crunch will not easily be solved, and the Turkish lira tumbled 1.8% on the day to 7.193 per dollar, close to its all-time low of 7.24 hit during a 2018 currency crisis.

A Fed policymaker - asked on Wednesday about extending swap facilities to Turkey and others in need - said the Fed already has lines with countries that have a relationship of “mutual trust” with the U.S., and the highest credit standards.

Richmond Fed President Thomas Barkin said the facilities were meant to stabilise markets and not provide funding as such, adding in an online forum that several countries including Turkey have access to an overnight repo facility.

“That is how we think about the structure of those programs and which countries are allowed in,” he said.


Analysts say the drop in the central bank’s reserves is largely due to its funding of state bank interventions to stabilise the lira, which has nonetheless fallen 17% so far this year.

In addition, Turkey has a relatively high $170 billion in external debt costs to pay this year.

Nikolay Markov, senior economist at Pictet Asset Management, who was on the call with Albayrak, said it was “just a matter of time” before the lira’s weakness and low reserves lead to a crisis in which Turkish firms or banks are unable to meet some debt obligations.

“There is no immediate risk of a full-fledged financial crisis but the risk has increased recently,” he said.

The conference bore echoes of a similar event held in mid-August, 2018, when Albayrak - then in his first month in the job - reassured foreign investors that Turkey would emerge stronger from its crisis in the wake of the lira tumbling to a record low.

On Wednesday, Turkey’s finance ministry confirmed that Albayrak had noted that Turkey’s gross foreign currency reserves stood at $53 billion, and said they exceeded aggregate short-term external obligations and were “sufficient”.

Several participants said he had sounded over-optimistic about economic prospects in the face of the cash crunch and the coronavirus pandemic.

Some said they had expected more detail on how the central bank is using swaps to fund tens of billions of dollars’ worth of sales by state banks to defend the currency.

Albayrak said the central bank was ensuring that currency markets were operating efficiently, and that reserves were accumulated in good times to be deployed in tougher times, according to one investor.

Despite the message of reassurance, the yield on Turkey’s dollar-denominated bonds rose, with some up as much as 28 basis points, the sharpest rise in a month, by the time the call had ended.

Additional reporting by Howard Schneider in Washington and Marc Jones and Tom Arnold in London; Editing by Alex Richardson, Kirsten Donovan and Kevin Liffey