Stock Groups

Turkish lira whipsaws from historic low after Erdogan announces rescue plan


An Ankara moneychanger holds Turkish Lira and U.S. Dollar banknotes. December 16, 2021, Turkey

Cagla Gurdogan | Reuters

Turkey’s liraIt has risen from records lows at breakneck speeds, witnessing wild swings after President Recep Takyip Erdogan announced a plan for supporting the battered currency to protect local deposits and prevent market moves.

The lira hit a day high of 11.0935 per dollar in early trading Tuesday — gaining as much as 20% against the dollar — but later pared some gains to trade at 12.77 around 2 p.m. in Istanbul. This is a significant improvement on Monday’s record-breaking low of 18 against the greenback.

The lira remains down over 40% against the dollar for the year despite the swings.

Erdogan spoke Monday night about steps to ensure savings in the lira. He also stated that the government would compensate deposits in the lira for losses if they are worth less than the banks’ interest rates.

Erdogan has long been a critic of interest rates. He called them the “mother-of-all evils” and insisted that rising rates caused inflation.

His refusal to raise rates for years and his apparent control of central bank monetary policies has contributed to the historic plunge in the lira that saw it drop from about 3 to the US dollar in 2016 down to around 18 to the USD this week. Turkey’s inflation currently stands at 21%.

How detailed?

Concrete details on the president’s scheme are still yet to be seen — and analysts are skeptical.

Goldman Sachs analyst wrote Tuesday that while the recent move was significant, it’s also important to note that Lira lost only the two previous weeks of losses and that depreciation year over year is still quite large.”

These measures won’t address the root causes of high inflation or currency depreciation.

Depositors have the right to borrow at rates that are similar to the National Interest Rate.[have]Given the expected and current inflation rates, the incentives to borrow for real assets or FX are there,” Goldman analysts suggested. They said they would not hold any more lire as the government asks them to. They added that they don’t believe this will structurally stabilize inflation or the exchange rates.

Root causes that are ‘not treated’

Piotr Mathys, analyst with InTouch Capital which offers market information to institutions also stressed the fact that the root cause of Turkey’s current currency crisis was not being addressed.

Erdogan announced that Erdogan would not address the “underlying issues” behind the USDTRY bullish bias. [dollar to lira]Matys said to CNBC. “Interest rates remain too low, with inflation at well over 20%. They will increase further in the next months following the fall of the ruble.”

Mayts stated that Turkey’s government was “clearly determined” to continue on the course established by President Erdogan. He insists Turkey needs to change its economic model, which means that interest rates must be lowered significantly in order to decrease its dependence on foreign capital. Mayts said that the key question was “whether Turkish households are able to trust their administration enough that any potential losses they may suffer if they convert their dollars into Turkish liras.”

Additionally, the cost of financial compensation for any losses from either Turkey’s central or Turkish Treasury is expected to be high. Analysts at Goldman Sachs stated that “This is an adverse credit development because it puts additional FX risks on the public sector’s balance sheet.”

Mayts indicated that it was unlikely for USDTRY to reverse as long the government continues to implement Erdonomics.