Ankara’s dream of Fed swap line

Since the COVID-19 crisis erupted, Turkish Central Bank’s reserves fell nearly 20 billion dollars. Now, the thought of “Can there be a swap line opened from the U.S. Central Bank Fedreserve ?” is in question.

During the corona crisis days, the foreign exchange rate sprang in Turkey and also the reserves depleted rapidly. Ankara is still eroding reserves to hold the exchange rate. Because of the epidemic, both in exports and in tourism we will have a considerable drop in revenues. At the same time, debt payments will also be waiting for us.    

Available reserves, when the Qatar and China Central Bank swaps which were make ups for the window dressing, swaps made with commercial banks and the gold reserves that are kept domestically are deducted, are below 35 billion dollars.

As I have repeatedly pointed out in the past, the reserves must have been protected, not eroded for the sake of using Central Bank resources and to be able to make substantial interest cuts. As a result of this, our reserves are now debatable. This could have been avoided. Unfortunately, the mechanism of “sweeping under the carpet” never stopped in Ankara.

After the loss of 20 billion dollars of reserves recently after the outbreak, the situation must have been recognized that President Erdoğan, in the March 27 meeting of the G-20 which he participated with teleconference, said, “the swap deals between central banks should be enlarged to cover all the members of the G20.”

Central Bank Governor Murat Uysal, in an interview to Anadolu Agency on April 19, told talks were held for “making new swap deals.”

It is highly probable that President Erdoğan brought up this subject also during his talks with U.S. President Trump.

Very clearly, Turkey wants Fed to open swap lines for itself. The Bloomberg story on April 9 and the Reuters story on April 10 regarding this demand have not been denied yet. 

On the week the epidemic started affecting financial markets, Fed opened five major central banks its swap line on March 14. On March 19, he expanded his swap facilities to nine more central banks. 

Those 14 countries Fed opened its swap line and used 400 billion dollars up to now are Europe (ECB), U.K., Canada, Japan, Switzerland, Australia, Denmark, Norway, Singapore, Brazil, Korea, Mexico, New Zealand and Sweden. This list is no different than the list of countries the swap line was opened during the 2008 global crisis. It is the same.

Well, would Fed open a swap line to Turkey’s Central Bank? Or let us ask this way: The Fed that did not open it in 2008, would it open it now? An additional question would be what criteria Fed has to open a swap line. 

In 2008, Fed first started with limited amounts for developing country central banks, then the line became unlimited. For Brazil, Korea, Mexico and Singapore, a 30-billion-dollar swap was set. This was to be used with Fed’s approval. 

Fed never announced its basic criteria to open a swap line to a central bank. However, in October 2008 when it opened swap lines for four developing country central banks, namely Brazil, Korea, Mexico and Singapore, the topics that were discussed in the FOMC meeting are in the minutes. This tells us what the criteria are.

Also, several sources report that developed countries that directly apply to Fed or apply to the US administration through diplomatic channel demanding swap arrangements have also been refused. 

What are the criteria?

First of all, each country the swap line is to be opened should have a significant economic and financial weight. For instance, if financial fragility in these economies has a potential to trigger a threat to the US economy or global economy. There are several references on this subject to the Mexico-U.S. relationship which has almost 700-billion-dollar trade volume.

Second, it is pointed out that those countries qualified to have swap lines opened generally follow cautious policies of low inflation, a controlled current account deficit and a public budget based on financial balance. For this reason, it is seen as an important reason that pressure in these countries do not lead to lessening of the appetite of global investors and the lessening of the dollar’s liquidity.

Third, there should be a strong reason that Fed’s swap line opened to these countries would help neutralize the economic and financial pressures these countries are facing. 

In 2008, several countries have resorted to official or unofficial channels in asking Fed to open swap lines for them. Turkish Central Bank Governor of that time, Durmuş Yılmaz said Turkey definitely did not apply. Other sources also said they did not have any knowledge that Turkey had applied.

In Fed minutes, it was openly discussed that except for the chosen four countries, other countries should not apply. More importantly, there was this tendency to transfer those that would approach them with this demand to the IMF.

What is the aim of Fed?

On Fed’s website, in the frequently asked questions, the swap issue is described. The aim of U.S. Dollar and Foreign Currency Liquidity Swaps is explained as follows, in short:

Because bank funding markets are global and have at times broken down, disrupting the provision of credit to households and businesses in the United States and other countries, the Federal Reserve has entered into agreements to establish central bank liquidity swap lines with a number of foreign central banks.

The swap lines are designed to improve liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress.

Fed is providing foreign central banks dollar liquidity through swap. Those central banks by injecting dollars in their own markets maintain the dollar loan channel open abroad. Fed is supporting the improvement of the economic conditions of these countries with the liquidity provided, thus the US economy is indirectly benefiting from this.

Turkey’s situation

When taken into consideration Fed’s criteria for opening swap lines to foreign central banks and the benefits it expects while doing so, we can say Turkey is quiet far from this opportunity. 

1. Since 2017, Turkey’s Central Bank has almost emptied its 60 billion dollars of U.S. securities kept in Fed’s securities account. Turkey does not constitute a risk for U.S. dollar loan flow. For instance, Brazil that has been granted a swap line is on the fourth place with its 300 billion-dollar worth of U.S. securities.

2. Turkey is a big country within the G-20 in terms of national income and foreign trade. However, the second criterion Fed has in technical level such as cautious policies based on low inflation rate, an acceptable current account deficit and a public budget based on financial balance were never met by Turkey.

3. Even though political criteria are not mentioned in the minutes, it can be said that Fed is working hand in glove with the U.S. Treasury and State Department and it implicitly follows the framework of the current foreign policy. After the Brunson crisis in 2018 and later the purchase of Russian S-400s that may lead to economic sanctions, Turkey is a country which the Fed will be very careful about.

4. Imagine a country where economy is mismanaged, where structural problems are amplified by political crises and where this is defined as “the conspiracy of foreigners.”  

When this country turns all the way around and demands a swap line from a country “which has declared economic war on us,” would you expect Fed to trade its currency with a swap line? 

5. There is a strange situation as such that Turkey has banned its banks from providing Turkish Lira in the swap market to foreign banks and institutions, thus practically banning US banks and companies to take TL loans through swap. While doing this, it demands to buy dollars by swap from Fed. Isn’t this black humor?

6. Beyond all of this, is Ankara trying to prevent the devaluation of the Turkish Lira with circulating “Fed to open swap line to Turkey” stories?