Istanbul, Bloomberg—Turkey’s default risk approached a 14-month high, underperforming similarly rated peers, as the central bank’s reluctance to raise interest rates to stem the lira’s drop risks diminishing foreign reserves.

The central bank has spent USD 8.3 billion since June 11 to shore up the lira, which fell to a record. Turkey’s credit- default swaps, contracts insuring debt against default, have risen 40 basis points this quarter to 231 at 10:16 am in Istanbul. That compares with a nine basis-point drop in swaps for Romania, which like Turkey is rated Baa3 at Moody’s Investors Service, the lowest investment grade. Contracts for Russia, rated two levels higher, rose three basis points to 199.

Turkey cannot rely on currency intervention to protect financial stability as its reserves of USD 109 billion are insufficient, according to Standard Bank Plc and GAM Investment. Foreign-exchange reserves are dwarfed by Brazil’s USD 374 billion and Russia’s USD 480 billion. The lira has sunk 7.3 percent in the last three months to a record in the biggest decline among emerging markets in Europe, the Middle East and Africa.

“It is fundamentals, especially the speed that Turkey’s burning through reserves,” which are driving default swaps higher, Paul McNamara, who manages USD 9 billion in emerging-market debt at GAM Investment in London, wrote in e-mailed comments August 23.

The cost to protect Turkish bonds rose to as high as 247 basis points on August 22, the most since June 2012. The lira reached a record low of 1.9992 against the dollar on August 23, before trading at 1.9922 Monday. The country’s debt is ranked at the lowest investment grade by Fitch Ratings and is assigned the top non-investment grade at Standard & Poor’s.

The central bank raised the overnight lending rate, the highest in a three-pronged rate corridor, by 75 basis points to 7.25 percent last month and by a further 50 basis points to 7.75 percent on Aug. 20 to try and stem losses in the lira, while leaving its two other key rates unchanged. Its benchmark one- week repo rate stands at 4.5 percent and the overnight borrowing rate at 3.5 percent. The central bank is likely to have to raise rates more aggressively, Citigroup Inc. emerging-markets currency strategist Luis Costa said by e-mail August 22.

This year’s current-account gap may be less than 7 percent of gross domestic product, Development Minister Cevdet Yılmaz said in an interview with CNBC-e television on August 23. This was still the highest rate among major emerging markets in Europe, the Middle East and Africa, according to data compiled by Bloomberg.

“It’s the understanding that Turkey at the moment has some particular vulnerabilities, including on the current account and external financing front, and also in terms of domestic and regional politics,” Tim Ash, chief emerging-markets strategist in Standard Bank in London, said in e-mailed comments on Aug. 23. “The market also knows that the central bank has limited foreign-exchange reserves to defend the currency.”

Brazil also stepped up its efforts to stem the real’s decline, announcing a USD 60 billion intervention program on August 22 involving currency swaps and loans. Investors are exiting emerging markets as the Federal Reserve prepares to reduce the amount of money it pumps into the world economy.

There were 142 trades covering USD 1.3 billion of Turkey’s debt in the week through Aug. 16, according to Depository Trust & Clearing Corp. data. In Romania, by comparison, there were 10 transactions valued at USD 85 million, while for Russian debt there were 171 valued at USD 1.5 billion.

Five-year credit-default swaps on Turkey dropped one basis point to 231 today. That compares with 197 for Russia and 200 for Brazil. Declining prices show improving perceptions for a borrower’s creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.

The central bank has “days or weeks at most” to continue with dollar sales at current volumes, Nigel Rendell, a senior analyst at Medley Global Advisors in London, said by e-mail Aug. 23. “They’ve spent USD 7 billion to USD 8 billion and have nothing to show for it. In the present markets, it’s little more than squandering dollars.”