Suspension of lira transactions by European banks hints at trouble to come

People walk on the deserted Istiklal Street in Istanbulss, during a four-day curfew to prevent the spread of the coronavirus epidemic. (AFP)
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Updated 19 May 2020

Suspension of lira transactions by European banks hints at trouble to come

  • Move comes after Ankara temporarily imposed similar bans on UBS, BNP Paribas and Citigroup

JEDDAH: Luxembourg-based Clearstream Banking and Belgium-based Euroclear Bank have jointly decided to suspend Turkish lira transactions over a shared electronic communications platform.

The decision is effective from May 18, according to a statement posted on Clearstream’s website.

The reason for the move was related to the liquidity restrictions on the lira due to the current coronavirus pandemic, Clearstream said in the statement. However, it recommended that its customers should maintain a buffer amount in their cash accounts in lira, and that they should monitor their securities settlements, trading on the Borsa Istanbul (Istanbul Stock Exchange) and cash transfer activity to prevent any failed transactions.

Orkun Saka, visiting fellow at London School of Economics and assistant professor of finance at University of Sussex, said it was not a good sign for international investors.

“However, it also depends on why these investors transact with Turkish financial markets. If the speculative players who simply trade Turkish lira to make profit from a possible crisis situation are discouraged by ‘sand in the wheels’ policies, it is not too bad for Turkey,” he told Arab News.

“On the other hand, if these regulations become permanent and start scaring investors who have productive capacity and intentions in the country, this could translate into a huge loss in the long term,” he added. Experts say the decision will make it more difficult for foreign investors to obtain and make transactions in lira. It is also a sign that the convertibility of Turkish lira might be at risk. Some financial analysts have also drawn attention to the possibility that Turkey might begin introducing capital controls to deflect the lira’s weakness, which would discourage external financing of the national economy.

The currency hit an all-time record low of 7.2 lira per US dollar on May 7.

On the same day, Turkish authorities introduced a transaction ban on BNP Paribas, Citigroup and UBS — a controversial move that was lifted after four days once they had all satisfied their liabilities with local banks.

The concerns over “speculative attacks” on the currency remain very fresh in the minds of Turkish officials.

Pro-government media accused unknown financial institutions of currency manipulation, while Turkish state-owned banks reportedly sold significant amounts of foreign currency recently in their battle to defend the currency against the dollar.

Last week, Turkish President Recep Tayyip Erdogan blamed the lira’s plunge on “those who think they can destroy our economy and corner us by exploiting financial institutions abroad.”

The volume of trading in lira has plummeted considerably as other foreign banks suspected further measures might be taken against them. For Saka, the recent ban on three foreign banks was a sign that Ankara will bring more regulations on capital flows to continue prioritizing a stable currency and low interest rates in the future.

“This will restrict the behavior of international investors bringing money in and out of the country. So far, the government has been temporarily applying these defense mechanisms to fend off speculation, but there is a risk that these may turn into permanent features of the Turkish financial markets,” he said.

In the meantime, the Turkish government is searching for funding from its allies to avoid a new currency crisis, similar to that of 2018, which increased unemployment and inflation rates.

Establishing currency swap lines with Japan and the UK, and expanding current facilities with China and Qatar, are reportedly on the table.

The government has also brought in stricter limits on local banks’ FX trading.

Saka noted that intervention policies, such as those applied by Turkey in 2018, are meant to be short-term, and that strict interventions are usually abandoned a few years after a crisis. “Let’s hope this will be the case for Turkey too,” he said.


HSBC reports lighter-than-expected third-quarter profit fall

Updated 27 October 2020

HSBC reports lighter-than-expected third-quarter profit fall

  • HSBC has a further headache – geopolitical tensions via its status as a major business conduit between China and the West

HONG KONG: HSBC said Tuesday its third-quarter post-tax profits fell 46 percent on-year as the Asia-focused banking giant continued to take a hammering from the coronavirus pandemic and spiraling China-US tensions.
However, the profit falls were not as bad as some analysts had predicted and HSBC said it expected credit losses to be at the lower end of a previously announced $8 billion to $13 billion range.
The global economic slowdown caused by the virus has hit financial giants hard and there is limited optimism on the horizon as Europe and the United States head into the winter with infections soaring once more.
HSBC has a further headache — geopolitical tensions via its status as a major business conduit between China and the West.
As a result, the lender is in the midst of a worldwide overhaul, aiming to slash some 35,000 jobs by 2022, primarily in its less profitable European and American divisions.
“We are accelerating the transformation of the Group, moving our focus from interest-rate sensitive business lines toward fee-generating businesses, and further reducing our operating costs,” chief executive Noel Quinn said in a statement accompanying the results.
Reported post-tax profit for the third quarter came in at $2 billion with revenue down 11 percent at $11.9 billion, the statement said.
Adjusted pre-tax profit slid 21 percent to $4.3 billion in the period, beating a $2.8 billion estimate by Bloomberg analysts.
Quinn described the latest figures as “promising results against a backdrop of the continuing impacts of Covid-19 on the global economy” as well as low interest rates.
In the first six months of 2020, HSBC’s post-tax profits were down 69 percent, meaning the third-quarter results were something of an improvement as some major economies relaxed some of their coronavirus restrictions.
The bank said its board would consider whether to pay “a conservative dividend” for 2020 based on final end of year results and how the global economy looks in early 2021.
Earlier this year, UK regulators called on British banks to scrap dividends for the year to preserve capital during the pandemic crisis.
HSBC makes 90 percent of its profit in Asia, with China and Hong Kong being the major drivers of growth.
As a result, it has found itself more vulnerable than most to the crossfire caused by the increasingly bellicose relationship between Beijing and Washington.
The bank has tried to stay in Beijing’s good graces.
It vocally backed a tough national security law that Beijing imposed on Hong Kong in June to end a year of unrest and pro-democracy protests.
The move sparked criticism in Washington and London but analysts saw it as an attempt to protect its access to China, which has a track record of punishing businesses that do not toe Beijing’s line.
“Geopolitical risk, particularly relating to trade and other tensions between the US and China, remains heightened,” HSBC said in Tuesday’s profit statement.
The US has sanctioned nearly a dozen key Hong Kong and Chinese officials over the national security law, telling international banks to stop doing business with them.
China’s national security law, however, forbids businesses in Hong Kong from adhering to foreign sanctions regimes, leaving many in an unclear regulatory tight spot.
“Investor and business sentiment in some sectors in Hong Kong remains dampened and ongoing tensions could result in an increasingly fragmented trade and regulatory environment,” HSBC said in its statement.
The bank also highlighted the uncertainty over Britain’s withdrawal from the European Union as another potential headwind.
Talks for a post-Brexit trade deal have made little headway with a 31 December deadline fast approaching.
“There is a risk of additional ECL (expected credit losses) charges, particularly in the UK in 4Q20, if the UK and the EU fail to reach a trade agreement,” the bank said.