Turkish lira whiplashes after Erdoğan moves to protect savings

Reuters

Turkey's lira rocketed back from record lows in volatile trading on Dec. 21 after Turkish President Recep Tayyip Erdoğan proposed measures to protect local currency savings against such swings.

Erdoğan introduced a series of steps late on Dec. 20 that he said will ease the burden of a weakened currency on Turks and encourage them to hold lira rather than dollars.

Under Erdoğan's plan, his government promised to guarantee deposits in lira, sending the currency soaring some 25%, its biggest intra-day rally on record, at one point on Dec. 20.

The Turkish currency, which has lost 44% of its value against the greenback this year, initially strengthened on Dec. 21 to a daily high of 11.0935 versus the dollar, later weakening to 14.3885 before swinging back to 12.6 at 1018 GMT.

The government has pledged to pay the difference between the value of 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 lira has plunged to record lows this year over fears of an inflationary spiral brought on by Erdoğan's push for monetary easing. At its low, it was down some 60% on the year.

Alpaslan Çakar, head of the Turkish Banks Association (TBB), said the Treasury would meet the costs of the measures, which could prove an expensive and inflationary initiative.

Some $1 billion was sold in markets after the announcement, Çakar said. Calculations by three bankers estimated around $1-1.5 billion in savings were converted to lira.

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.

Finance Minister Nurettin Nebati said details of the new economic scheme would be announced at 1100 GMT.

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%, its highest on record.

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.

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.

'Mother of all rallies'

While the government called the lira's rebound on Dec. 20 a major win on policy, economists have said Erdoğan's economic program based on low interest rates is reckless and expect inflation, currently above 21%, to blow through 30% 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 6.12% on Dec. 21, triggering indexwide circuit breakers that halt trading temporarily.

Under pressure from Erdoğan, 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 Dec. 20.

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 Rafet Gürkaynak, 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."