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Turkey’s ban on pound loans to some companies sparks ‘rally’

Turkey is stepping up efforts to strengthen the pound and curb lending with a surprise measure banning loans to companies deemed to have foreign currency cash, sending the domestic currency into the biggest rally of the year.

The country’s banking regulator limits commercial loans in pounds to corporate borrowers if they hold more than 15 15 million ($ 890,000) in foreign currency and if the amount exceeds 10% of total assets or annual sales. The authority, known as the BDDK, announced the decision this Friday.

The number of companies that will be affected by the new rule is about 10,000, but due to a number of exceptions, the final number will be smaller, according to a person who knows the rule and asked not to be named, because he is not authorized to speak publicly about theme. Businesses can buy Eurobonds or invest in foreign currency deposit accounts to avoid restrictions, the person said.

The move sparked a rally in the pound on Friday, which at one point rose 5% against the dollar, the biggest this year. The Turkish currency rose 2.5%, the largest gain in the world against the dollar on Friday.

This step is one of the most dynamic interventions of the Turkish authorities in support of the pound, which continues to have the worst performance in the emerging markets this year. It can push foreign exchange companies to get rid of these assets if they want access to new credit in pounds, according to Evren Kirikoglu, an independent strategic analyst in Istanbul.

This decision is the latest in Turkey in its attempt to stabilize the pound at a time when the country’s interest rates are the most negative in the world, when inflation is taken into account. The gap in borrowing costs will widen as global central banks begin the most aggressive tightening of monetary policy since the 1980s.

Under pressure from President Recep Tayyip Erdogan to keep interest rates low, policymakers have instead taken steps to curb credit growth and make the pound more attractive to savers and businesses. On Thursday, the regulator announced another rule aimed at preventing pound borrowing abroad through swaps.

Source: Capital

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