Turkey, Qatar in Currency Swap Deal

The central banks of Qatar and Turkey signed a currency swap agreement in the Qatari capital Doha. Qatar agreed to help the Turkish economy weather a currency rout with a credit line to backstop its financial system, the first concrete measure after the Persian Gulf Arab nation pledged as much as $15 billion of investment in Turkey.

The lira weakened, with the prospect of further US sanctions targeting President Recep Tayyip Erdogan’s government keeping traders on edge as the nation’s bond and equity markets closed for a weeklong public holiday. Turkey’s credit rating was cut further into junk territory on Friday by S&P Global Ratings and Moody’s Investors Service, Bloomberg reported.

The swap agreement aims to facilitate trade between the two countries, support financial stability and provide liquidity, according to the Qatari central bank. The funding for the first phase of the deal is expected to be worth $3 billion, the Turkish central bank said.

An escalating dispute over US pastor Andrew Brunson’s continued detention has roiled financial markets in Turkey and beyond, having sent the lira down more than 20% against the dollar the past three weeks. Turkish authorities have so far resisted raising headline interest rates to stem the rout, resorting instead to tightening liquidity and increasing the cost of betting against the currency.

The Trump administration has rejected an effort by Turkey to tie Brunson’s release with relief for a Turkish bank facing US fines, Wall Street Journal reported, citing an unidentified senior White House official.

Societe Generale SA sees the lira weakening to eight per dollar—it started the year stronger than 4—before reaching “the pain threshold that compels Turkey to compromise on some of its strategic objectives,” said Phoenix Kalen, a London-based strategist. Kalen no longer expects the central bank to raise its benchmark 17.75% repo rate before its next scheduled meeting on Sept. 13.

By shutting banks off from borrowing at that rate and forcing them to turn to the overnight lending rate—currently at 19.25%—policymakers have effectively enacted a 150 basis-point hike. The banking regulator has also placed limits on local banks’ swap and swap-like transactions in an effort to deter short sellers in the currency, a move that some analysts say will weigh on investor demand for other Turkish assets.