Turkish Opposition Warns Borrowing Spree Abroad Could Backfire

(Bloomberg) -- The Turkish government’s strategy of heavy borrowing abroad this early in the year risks triggering a spike in lira bond yields after municipal elections in March, the nation’s main opposition party said.

“The government is pressuring exchange rates and yields as it borrows heavily in foreign currencies,” Faik Oztrak, spokesman for the Republican People’s Party, or CHP, said in an interview in Istanbul. “This will create serious troubles after the vote, when they will have to resort to heavy domestic borrowing. That would send yields higher.”

In a bid to keep a lid on rates before polls on March 31, the government has curbed domestic bond sales and turned instead to foreign investors for its financing needs. While that’s helped fuel a rally in local-currency debt, concern is growing that the policy could backfire if the government’s budget continues to widen as the economy slows.

The Treasury has already locked in $5.4 billion from international markets this year against a full-year target of $8 billion, capitalizing on buoyant risk appetite and hunt for yield spreading across emerging markets. In January, Treasury & Finance Minister Berat Albayrak said the government is in talks to sell samurai bonds to Japanese investors.

While the strategy may be “disturbing” for some market players, it has helped reduce borrowing costs, Albayrak said in December. The Treasury hasn’t sold a 10-year bond since July, helping spur a 750 basis-point plunge in yields from a peak in August, the biggest drop among emerging markets tracked by Bloomberg.

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