Turkey ‘faces high bar over US Fed funding’
Former New York Fed chief cites ‘bumpy relations’ with Washington as major hurdle to currency swap
Former New York Fed chief
DECODER
A swap line means the Fed accepts other currencies in exchange for dollars.
Turkey’s foreign cash needs are unlikely to be relieved by the US Federal Reserve given its economic challenges and volatile diplomatic relations with Washington, the New York Fed’s former chief said.
William Dudley, who from 2009-2018 was vice chair of the US central bank’s policy-making committee and ran its New York branch that oversees foreign funding, said “there is definitely a significant reluctance” to expanding the dollar swap lines. Ankara is facing a cash crunch of depleted foreign reserves and relatively high debt obligations, and has appealed directly to Washington for a Fed dollar swap line. It is also discussing funding with other central banks.
Dudley said that while some geopolitical friction between Ankara and Washington could pose a hurdle, a strong endorsement from US President Donald Trump could influence the Fed’s decision whether to extend funding to Turkey.
“I would be very surprised if the Fed did it unilaterally,” Dudley said by telephone.
“It seems the reasons the swaps are needed in Turkey do not fit into the Fed’s stated goals. It’s also hard to imagine that the Fed would run out swaps to a country that is having some bumpy relations with the US,” he added. “Never say never, but the bar is pretty high to extending these swaps.”
The comments could dampen Turkey’s hopes of securing funding from the Fed, which did not include Turkey when in March it expanded dollar lines to Brazil,
New Zealand, South Korea and others in response to the coronavirus pandemic.
The Turkish lira tumbled to a historic low against the dollar last week and is down more than 15 percent this year as investors fretted over the cash crunch and a severe economic slump due to pandemic containment measures. Net foreign currency reserves at Turkey’s central bank have fallen to around $28 billion from $40 billion so far this year, reaching as low as $25 billion three weeks ago. The country’s short-term foreign obligations are around $170 billion.
Swap lines — in which the Fed accepts other currencies in exchange for dollars — are meant to support big foreign dollar markets and any facility would be conditional in part on counterparty risk.
The US central bank has not commented on Turkey’s request. Asked last week about extending swaps to Turkey or others in need, a current Fed policymaker said lines are already in place with countries that have a relationship of “mutual trust” and high credit standards. Dudley, who played a role selecting the Fed’s original swaps recipients ahead of the 2008 financial crisis, said however the central bank could reconsider a facility especially if the White House lobbied on Turkey’s behalf.
“You could imagine the Trump Administration weighing in in a forceful way that would affect the Fed’s thinking,” he said, adding foreign funding remains controversial in Washington.
“The Fed doesn’t want to pick winners and losers and effectively choose who is following an appropriate set of economic policies. It’s really for that country and the IMF to decide how to support foreign investor confidence,” said Dudley. Ankara’s relations with NATO ally Washington have been bruised by disputes over human rights, Western sanctions on Iran and Turkey’s purchase of Russian S-400 missile defenses for which it faces potential US sanctions.