Turkish lira depreciates after Erdogan moves to protect savings

FILE PHOTO: A money changer holds Turkish lira banknotes at a foreign exchange office in Ankara
FILE PHOTO: A money changer holds Turkish lira banknotes at a money changer office in Ankara, Turkey September 27, 2021. REUTERS / Cagla Gurdogan / File Photo

December 21, 2021

By Tuvan Gumrukcu and Nevzat Devranoglu

ANKARA (Reuters) – The Turkish lira bounced back from record lows in volatile trading on Tuesday after Turkish President Tayyip Erdogan proposed measures to protect local currency savings against threats. such fluctuations.

Erdogan introduced a series of steps late Monday that he said would ease the burden of the weakening currency on Turks and encourage them to hold lira instead of dollars.

Under Erdogan’s plan, his government promised to guarantee deposits in lira, sending the currency soaring about 25%, the biggest intraday gain on record, at one point on Monday.

Analysts and bankers warn that if the lira recovery falters and reverses, the government will have to be ready to cover future losses based on the exchange rate. It can also cause already high inflation.

The Turkish currency, which has lost 44% of its value against the greenback this year, initially strengthened on Tuesday to a daily high of 11.0935 against the dollar, then weakened to 14, 3885 before falling back to 13.1 at 1417 GMT.

Implied volatility in the lira – or expected change in price – rose to its highest on record, reflecting uncertainty about the plan even as the Treasury Department provided some information. detail.

The government has pledged to pay the difference between the lira savings interest and the equivalent dollar deposit.

More than half of locals’ savings are in foreign currencies and gold, according to central bank data, due to a loss of confidence in the lira after years of devaluation.

The currency has fallen to a record low this year on fears of an inflationary spiral driven by Erdogan’s push for monetary easing. At the low end, it is down about 60% for the year.

A source with knowledge of the matter said the measures were decided after the exchange rate hit a “problematic” level, adding that the government would manage it carefully in the coming period.

“The dollar and the euro have risen to the point where they actually form a bubble. This needs intervention. This situation is not sustainable,” the person said, requesting anonymity.

Turkey’s five-year credit default swaps, the cost of insuring against sovereign default, rose to 613 bps, the highest since May 2020, according to IHS Markit. IHS Markit.

Meanwhile, a month saw volatility in the Turkish lira rising to 63%, the highest on record.

Graphics: Lira volatility hits record-breaking

The Treasury Department said the new tool will be available to retail investors’ lira savings with maturities ranging from 3 to 12 months, with a minimum central bank policy deposit yield.

Presidential adviser Cemil Ertem told Reuters the moves removed individual investors’ need for the dollar, adding it was “a very important paradigm shift” for the economy. Turkish economy.


While the government called Monday’s lira rally a major policy win, economists say Erdogan’s economic program based on low interest rates is reckless and inflationary expectations, currently, above 21%, will surpass 30% next year.

Turkey’s energy regulator EPDK said that after the lira’s rally, it has halted planned rallies for now. Turkey’s main BIST 100 stock index fell 7.66% on Tuesday, triggering an index-wide circuit breaker that temporarily halted trading.

Under pressure from Erdogan, the central bank has cut 500 basis points since September. The president has pledged to continue his low interest rate policy, including on Monday.

Some economists say the new measures are effectively masked rate hikes that may ultimately fail to stem selling pressure on the lira, while also straining the Treasury Department.

“It can have dangerous consequences,” said Refet Gurkaynak, dean of the economics department at Bilkent University in Ankara.

Jeffrey Halley, senior market analyst, Asia Pacific, OANDA, said it remains unclear how the government will implement the new measures “especially in the short term”.

(Additional reporting by Orhan Coskun in Ankara, Ebru Tuncay in Istanbul and Davide Barbuscia in Dubai; Editing by Jonathan Spicer, Sam Holmes, Ana Nicolaci da Costa and Alexander Smith) Turkish lira depreciates after Erdogan moves to protect savings

Bobby Allyn

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