Skip to main content

A money changer holds Turkish lira banknotes at a currency exchange office in Ankara, on Sept. 27.CAGLA GURDOGAN/Reuters

Turkey risks damaging confidence in the lira further by using “borrowed” reserves to defend its exchange rate and recent developments put its current sovereign debt credit rating at risk, S&P Global Ratings said on Thursday.

The ratings agency said in a statement e-mailed to Reuters that the greater part of the central bank’s FX reserves are borrowed from households indirectly via reserve requirements against FX and gold deposits or through Turkish commercial banks via swap lines.

“Using these borrowed reserves to defend an exchange rate appears to us to risk damaging confidence in the lira even further, and potentially raising financial stability questions,” S&P said, which has a current rating for Turkey of B+ with a stable outlook.

The lira crashed almost 30 per cent last month as the central bank made its third interest rate cut is quick succession despite soaring inflation. The central bank on Wednesday said it had intervened in currency markets to prop up the lira.

S&P also warned that Turkey had seen a “significant amount of quasi fiscal activity” via state banks and it cautioned against assessing Turkey’s fiscal health by headline numbers alone.

If Turkish banks ultimately run into trouble they may need considerable capital support, S&P added.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.