(Bloomberg) -- International investors fleeing Turkish stocks and bonds have created a massive bottleneck in the market for liras.

As funds dump Turkish assets and receive liras in exchange, they’re also scrambling to unwind currency hedges -- driving the cost of borrowing liras overnight on the offshore swap market to extreme levels. At one point on Tuesday, the rate reached as high as 1,400%, according to data compiled by Bloomberg.

“As everyone tries to exit at the same time, it causes spikes in lira rates,” said Onur Ilgen, the head of treasury at MUFG Bank Turkey in Istanbul.

Another reason behind the crunch: Turkey severely restricts how much banks can lend to foreign investors via swaps. The rules, which were imposed after the currency collapse of 2018, are designed to make it prohibitively expensive for anyone to short the lira during a time of crisis. They can also make trading difficult for investors with hedged lira positions.

Central Bank of Erdogan Has Foreign Cash Exiting Turkey

Violent swings in Turkish markets have been unleashed this week after President Recep Tayyip Erdogan unexpectedly fired his central bank chief, sowing uncertainty about the country’s future monetary policy. Among investors, there are concerns that the central bank has lost credibility, and with inflation accelerating to almost 16% in February, the economy faces severe challenges.

Just a few weeks ago, the lira was among the best-performing emerging-market currencies and investors were returning to Turkey on the belief that former central bank Governor Naci Agbal’s policies could bring inflation under control. Now the big question is whether the country will once again embark on a path of cutting rates, how quickly it might happen.

As investors hunt for lira to close the swaps, some of the demand showed up in the local spot market. The currency was only 1% weaker at 7.8808 against the dollar on Tuesday -- a sign of stability after yesterday’s 8% plunge.

Still, many analysts are unconvinced that the losses are over. Renaissance Capital predicts the currency could slide a further 12% by year-end, while Commerzbank AG expects it to reach 10 per dollar.

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