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December 22, 2021

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Lira stages strong rebound as Erdogan acts

Turkey’s lira gained as much as 15 percent in volatile trade yesterday, posting a historic rebound from record lows in the previous session after President Recep Tayyip Erdogan unveiled a plan he said would guarantee local currency deposits against market fluctuations.

The currency opened slightly lower then strengthened to the day’s day high of 11.0935 versus the dollar in early trade, before retreating.

In a late Monday speech, Erdogan introduced a series of steps that he said will ease the burden of a weakened currency on Turks and will encourage them to hold lira savings rather than dollars.

The government promised to guarantee deposits in lira, sending the currency soaring 25 percent — its biggest intra-day rally on record.

Under the measure, the government promised to pay the difference between the value of savings in lira and equivalent dollar deposits. More than half of locals’ savings are in foreign currencies and gold due to lira depreciation over the years, according to central bank data.

Alpaslan Cakar, head of the Turkish Banks Association, said the Treasury would meet the costs of the measures, which could potentially be an expensive and inflationary initiative. Some US$1 billion was sold in markets after the announcement, Cakar said.

According to calculations by three bankers, around US$1-1.5 billion in savings were converted to lira on Monday night.

But Turkey’s five-year credit default swaps, the cost to insure against a sovereign default, jumped to 613 bps, the highest since May 2020, according to IHS Markit.

The lira has plunged to record lows this year over fears of an inflationary spiral brought on by Erdogan’s push for monetary easing, losing about 40 percent of its value in the past month alone. At its low, it was down 60 percent on the year.

“We are presenting a new financial alternative to citizens who want to alleviate their concerns stemming from the rise in exchange rates when they evaluate their savings,” Erdogan said after a cabinet meeting, while repeating his defence of a low-rates policy that initially caused the lira’s slide.

A senior banker said infrastructure and regulation would have to be introduced before the deposit guarantee measure could be implemented, adding it was not clear how the extra money given by the government to the deposit holder would be taxed.

“How and when is the Treasury going to pay the difference? Is it going to pay once every three months, or once every six months? These are not clear,” the banker said on condition of anonymity.

While the government called the lira’s rebound on Monday a major win, economists have repeatedly said Erdogan’s economic program based on low interest rates is reckless and expect inflation — currently above 21 percent — to blow through 30 percent next year.

Turkey’s EPDK energy regulator said, after the lira’s rally, it had halted planned price hikes for now. Turkey’s main BIST 100 stock index was down 2.2 percent yesterday.

Under pressure from Erdogan, the central bank has cut rates by 500 basis points since September.

Some economists have said the new measures are effectively veiled rate hikes that may not ultimately stem the selling pressure on the lira, while they are putting a strain on the Treasury.

“It can have dangerous consequences,” said Refet Gurkaynak, head of Bilkent University’s economics department.


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