Turkish banks and other types of lenders cashed up to $4.5 billion worth of gold reserves during the past three months in order to prevent a liquidity crisis amid the plummeting lira, Bloomberg reported.
“The commercial banks were probably switching to more liquid assets, given what has happened to the lira,” Capital Economics senior emerging markets economist Jason Tuvey told the media company on Friday. “There’s been concern at the commercial banks over their external debt burden, which has been reflected in the rising bank bond yields.”
A sharp drop in the lira this summer was partly triggered by markets’ concerns over Turkish President Tayyip Erdogan’s influence over monetary policy.
Erdogan’s policy has been very supportive of lower interest rates, which encourage banks to lend money and increase private spending.
With concerns over Turkish central bank’s independence floating around as well as a political row with the U.S. weighing on the markets, the lira came crashing down this summer, falling almost 40% against the U.S. dollar since the start of the year.
Bloomberg pointed out that the Central Bank of Turkey’s weekly gold holdings fell nearly 20% since mid-June to 15.5 million ounces, noting that the move was accompanied by central bank’s decision to lower reserve requirements for banks by 4 percentage points for foreign exchange liabilities over one, two and three years, and by 2.5 percentage points over other maturities.
“With this revision, approximately 10 billion TL, 6 billion U.S. dollars, and 3 billion U.S. dollars equivalent of gold liquidity will be provided to the financial system,” Turkish central bank said in a statement on August 13.
Important to keep in mind that Turkish commercial banks are permitted to match the reserve requirements with bullion deposits.
Turkey plays a central role in the precious metals market and is one of the top 20 sovereign gold holders as well as the world’s fifth largest gold consumer, according to the World Gold Council (WGC).