Economy

Turkish lira rockets back from record lows after Erdogan moves to protect savings

Erdogan introduces series of steps that he says will ease burden of weakened currency on Turks

A bystander looking at shops in the Eminonu bazaar district of Istanbul, Turkey. Photograph: Ozan Kose/AFP

Tue Dec 21 2021 - 20:19

Turkey’s lira rocketed back from record lows in volatile trading on Tuesday after Turkish president Tayyip Erdogan proposed measures to protect local currency savings against such swings.

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

Under Mr Erdogan’s plan his government promised to guarantee deposits in lira, sending the currency soaring some 25 per cent, its biggest intra-day rally on record, at one point on Monday.

Analysts and bankers warned that if the lira’s rally fizzles and reverses, the government would be on the hook to cover future losses based on the exchange rate. It could also stoke already high inflation.

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The Turkish currency, which has lost 44 per cent of its value against the greenback this year, initially strengthened on Tuesday to a daily high of 11.0935 versus the dollar, later weakening to 14.3885 before swinging back to 13.1 at 2.17pm.

Implied volatility on the lira – or expected price swings – jumped to the highest on record, reflecting uncertainty about the scheme even as the treasury provided some details.

The government has pledged to pay the difference between the yield on savings in lira and equivalent dollar deposits.

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

The currency has plunged to record lows this year over fears of an inflationary spiral brought on by Mr Erdogan’s push for monetary easing. At its low it was down some 60 per cent on the year.

Bubble

A source with knowledge on the matter said the measures were decided after the exchange rate hit “problematic” levels, adding the government would manage the coming period carefully.

“The dollar and euro had risen up to the point of forming a bubble really. This needed to be intervened in. This situation was not sustainable,” the person said, requesting anonymity.

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

Meanwhile, one month implied volatility in the Turkish lira jumped to 63 per cent, its highest on record.

The finance ministry said the new instrument would be available for lira savings by retail investors with maturities of three to 12 months, with the minimum central bank policy rate deposit yield.

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

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

Circuit breakers

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 7.66 per cent on Tuesday, triggering indexwide circuit breakers that halt trading temporarily.

Under pressure from Mr Erdogan the central bank has cut rates by 500 basis points since September. The president has pledged to continue with his low-rates policy, including on Monday.

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

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

Jeffrey Halley, senior market analyst, Asia Pacific, OANDA, said it remained unclear how the government would carry out the new measures “especially in a short time”.

(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)

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