Turkey’s Crypto Pain Grows With Second Exchange Collapse

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Bloomberg

(Bloomberg) – Europe’s brightening economic outlook as Covid-19 vaccinations pick up is also accelerating the timetable toward a new danger.As investors get ready for growth to break out, they’re also preparing for the inevitable consequence: withdrawal of European Central Bank emergency funding. For the region’s most indebted economies — including perennial standout Italy — that would put them face-to-face with market forces they can’t handle. Citigroup Inc. is bracing for a taper of bond buying as early as June, and M&G Investments says it’s time to start shorting peripheral debt.Because of the ECB’s dramatic measures over the past year, never have borrowing costs in the euro-area been so disconnected from risk. Much of the region is coming off the back of the worst recession since at least World War II, deficits have soared and debt is at eye-watering levels.Yet an investor lending money to Italy for 10 years can only expect to receive a rate of interest of around 0.75%. Greek bonds, considered a junk asset by all three of the major credit ratings agencies, come with a rate of less than 1%. A decade ago, the euro-area debt crisis pushed its yields above 40%.“You only get temporary elimination of credit risk in European sovereigns when you’re in an emergency,” said Eric Lonergan, a money manager at M&G. “The problem is when you come out of emergency, you’re back to market forces in your bond market and some of these numbers look really, really bad. Europe is ironically vulnerable to recovery.”The rally in euro-area debt is mostly down to the ECB’s 1.85 trillion-euro ($2.2 trillion) pandemic bond purchase program, and it’s helped to line investor pockets. Over the past year alone, Italian bondholders have made returns of more than 10%, according to Bloomberg Barclays Indices. Over a decade, they would have nearly doubled their money. “The country is able to refinance debt at much lower yields because of the ECB, so the crisis has been somewhat of a blessing in disguise for Italy,” according to Hendrik Tuch, head of fixed income NL at Aegon Asset Management. “Low Italian sovereign bond yields and spreads are not made in Rome but in Brussels and Frankfurt, which is the main issue for the longer-term outlook on Italian sovereign bonds.”While ECB President Christine Lagarde said this week that it would be “premature” to talk about easing support, the debate about what to do and when could be fast approaching. Some policy makers are ready to argue at the June meeting that the pandemic emergency purchase program should start being scaled back in the third quarter, Bloomberg reported Friday, citing officials familiar with internal deliberations. Read More: ECB Officials Expect Heated June Decision on Crisis Program Lagarde Says ECB Isn’t Discussing Phase-Out of Stimulus Bloomberg Economics: Lagarde’s Optimism Suggests Less PEPP Buying After 2QDespite Lagarde’s reassuring words, such talk will heighten investor focus on the day of reckoning. Without emergency support, the focus will return to debt in Greece, Italy and Spain, which ballooned further in 2020 due to necessary health and crisis spending, and whether it can ever be brought under control.At PGIM Fixed Income, which manages about $968 billion, head of global bonds Robert Tipp is keeping the tilt toward peripheral bonds he’s had since the sovereign debt crisis, but is also starting to worry about the post-taper outlook.“The risk is how fraught is the process of going from this heavy stimulus environment back to one of fiscal rectitude,” he said. “The fundamentals are lousy for some of these countries.”For now, European Union member states are preparing to spend money from the bloc’s recovery fund, due to start disbursing cash around the middle of the year. Italian Prime Minister Mario Draghi, the former ECB president credited with saving the euro during the last debt crisis, is planning to reengineer Italy’s economy with more than 200 billion euros of funds.But while this stimulus will help the recovery, the question is whether it will generate sustained growth strong enough to meaningfully chip away at Italy’s enormous debt pile, currently around 160% of economic output. Fitch Ratings warned this month that Greece’s debt-to-GDP ratio would stay above 200% this year and any failure to reduce it could lead to a negative rating action.Another key question is when the EU might re-impose fiscal rules — which were suspended during the pandemic — and what form they will take. While the fiscal situation in some countries has to be tackled, overly strict targets, for example on deficits, could do more damage than good by sucking life out of economies. Saxo Bank A/S is one of the biggest doomsayers on Europe’s periphery, warning that there could be a sovereign debt crisis part 2, beginning with a exodus of foreign investors from Greek debt, where they own 90%. Saxo’s concern is that with U.S. bond yields 60 basis points higher than at the start of the year — and with the currency hedging equation increasingly favorable — investors would prefer to put money there rather than in higher-yielding European sovereigns.For the ECB, the unwinding dilemma will once again see it grappling with the inherent challenge of the euro area: setting monetary policy for 19 countries with vastly different economic, inflation, unemployment and debt situations. If it begins to tighten, the peripheral nations will be the ones that lose out, making their huge deficits harder to finance.“It’s very difficult to see something anything other than fiscal austerity,” said M&G’s Lonergan. “I don’t know when it will strike but I think you’re getting very, very good odds if you look at a lot of the more vulnerable parts of the European bond market now.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.

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Turkey probes second crypto exchange as market implodes

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The volume of crypto purchases in Turkey rose 10-fold between November and March

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Istanbul (AFP)

Turkey on Saturday detained the chief of one of the country’s biggest cryptocurrency firms after launching a manhunt for the founder of another exchange who fled to Albania.

The Turkish crypto boom threatens to go bust quickly as companies fold and President Recep Tayyip Erdogan’s government prepares to rein in the unregulated digital currency market.

The volume of crypto purchases in the nation of 84 million people rose 10-fold between November and March as Turks sought ways to preserve their savings during a steep drop in the value of the lira currency.

But the market began to unravel when the Istanbul-based Thodex exchange’s founder Faruk Fatih Ozer fled to Albania with a reported $2 billion in investors' assets this week.

Thodex shut down while holding investments from nearly 400,000 users.

Turkey issued an international arrest warrant and detained dozens of Thodex employees in raids staged across the country on Friday.

Officials also blocked the account of the Vebitcoin exchange – one of Turkey’s five-largest – and launched an investigation after it also abruptly ceased operations.

Local news reports said police detained Vebitcoin chief executive Ilker Bas and three other company employees on Saturday as part of a broader fraud probe.

“Due to the recent developments in the crypto money industry, our transactions have become much more intense than expected,” Vebitcoin said on its website.

“We would like to state with regret that this situation has led us to a very difficult process in the financial field. We have decided to cease our activities in order to fulfil all regulations and claims.”

Data shared with AFP by the Chainalysis and Kaiko analytics firms show the daily volume of all crypto purchases in Turkey rising from around 500 million liras ($60 million) in November to as much as six billion liras in March.

Coinhills ranks Turkey as the fifth-biggest crypto market in the world.

It could be bigger still because many Turkish traders use popular off-shore exchanges in countries such as Malta.

But Erdogan’s government is preparing to tighten regulations after deciding to ban cryptos from being used for purchases of goods and services starting on April 30.

The Turkish central bank warned last week that cryptocurrencies “entail significant risks”.

“Wallets can be stolen or used unlawfully without the authorisation of their holders,” the central bank said.

The problems at Thodex started after it ran a promotion offering Dogecoins to investors at one-fourth the price the popular currency was selling on other exchanges.

But Thodex users complained that it was a scam that prevented them from re-selling the coins at their full market value or trading them for other cryptos.

Turkish prosecutors accused Ozer of “aggravated fraud and founding a criminal organisation”.

The tumult in Turkey created ripples across the global crypto market and saw the value of bitcoin slip back under $50,000 after reaching $57,000 at the start of the week.

Analysts say the lack of oversight makes users more susceptible to fraud in Turkey than they would be in countries, where digital trades are reported to officials and taxed.

“Because cryptocurrency is currently unregulated (in Turkey), it could be more vulnerable to abuse and illicit activity,” Chainalysis’s government affairs chief Jesse Spiro told AFP.

“In general, regulations help build trust in this new asset class. On the other hand, the instability of the lira could make cryptocurrency more attractive.”

© 2021 AFP