Turkish Central Bank doubles conversion obligation for foreign currency to Turkish Lira

Central Bank of Turkey has increased the conversion obligation from foreign currency to Turkish Lira for individuals in banks from 5% to 10%. The banks have been given until July 28 to comply with this requirement.

The amendment made in the Regulation on Securities Depository imposes an additional 10% conversion obligation from May 26th to July 28th on banks that fail to meet the conversion target for individual foreign currency accounts. These banks will be required to fulfill the remaining portion of the obligation by depositing securities for a period of six months.

As a result, the conversion target, which was previously set at 5%, will now increase to 15%.

After July 28, the threshold for additional conversion from foreign currency to Turkish Lira will rise to 30%. Banks that fail to meet this rate will be required to block an additional 10% of securities until they achieve the target.

Meanwhile, in the free market and banks, the US dollar, which was previously traded at 19.72 lira, is now being traded at 20.25 lira.

On Tuesday, banking stocks and sovereign dollar bonds slid for a second day and the cost of insuring exposure to Turkish debt rose further after Erdogan defied expectations in Sunday's presidential race.

"Markets are now reacting to the fact that we're probably going to get a return to the previous administration and a continuity of the policies that have made Turkey almost un-investable as far as Western fund managers are concerned," said Jon Harrison, managing director of emerging market macro strategy at TS Lombard.

Longer-dated, dollar-denominated government bonds had the biggest falls in fixed-income markets, although key corporate and banking sector bonds also edged lower.

The government's 2045-maturing bond dropped 3 cents to trade at 71 cents on the dollar. Five-year credit default swaps, which indicate the price of insuring government debt against default, climbed to 653 basis points, up 19 bps from Monday's close and 161 bps above Friday's pre-election level.

Credit ratings agency Fitch said the political and economic uncertainty would continue at least until after the runoff, and that its focus regarding Turkey's "B"/Negative sovereign rating after the election would be whether the policy mix "becomes more credible and consistent."

Turkey's interest rate swap forwards, which are a rough guide for where traders expect the country's interest rates to be once "risk premia" is added on, are now pricing them at around 27% in a year's time, compared with a pre-election level of over 40%.

Banking stocks, which had surged 26% in the week ahead of the election, closed just under 8% lower on Tuesday to take their two-day losses to nearly 17%.