Turkey: The Turkish lira regains its value at the beginning of the month after the announcement of compensation for savers | Economy

If Turkish soap operas have accustomed us to a roller coaster of emotions per episode, the currency of the new soap opera homeland has decided to follow a similar scenario: after depreciating by 10%, reaching new lows on Monday, it recovered 60% of its value overnight – the lira’s biggest rise in four decades – after the government announced extraordinary measures, it opened the day green on Tuesday, only to plunge 20 % and then appreciate again. The result is that it has regained the value it had at the end of last month (12.7 liras for the dollar and 14.3 for the euro), although it is still 40% lower than that of the beginning of the year.

In his speeches, Turkish President Recep Tayyip Erdogan usually brags about economic knowledge – he has a university degree in business management, although some think that is wrong – but what he really knows how to do is is politics, time management, rhetoric. Because what he did to recover the value of the lira was a sleight of hand that stunned observers — “he pulled a rabbit out of the hat,” says analyst Timothy Ash of the BlueBay fund — and that , despite everything worked. At least for the moment.

Erdogan has been embroiled in a crusade against interest rates for years and since September has forced his central bank to cut them from 19% to 14% while the rest of the world’s central banks take the opposite route in anticipation of effects of cones of the US Federal Reserve and similar measures in the euro area. Erdogan argues, against most economists, that “interest is the cause of inflation, not its consequence” and, since he is an Islamist and the Koran forbids usury, there is no way to reverse this policy of lowering rates. In reality, more than religion or ideology, there is in its policy a strategy of overheating the economy to the maximum by a credit bubble which encourages production and exports, and thus achieves high growth rates of the GDP and secure re-election as President in the 2023 elections.

However, the consequence of these policies has been galloping inflation (21% according to the official statistics institute and more than 50% per year according to calculations by the statistics office of Istanbul City Hall and independent academics), which left banks’ real interest in negative territory. This has caused a flight of Turkish investors and individuals, who in the past month have thrown the lira by the shovel -64% of the volume of Turkish bank deposits is in dollars or other hard currencies-, a panic that has in recent days pushed the lira to record highs.

On Monday, instead, Erdogan announced extraordinary measures to alleviate the problems that the depreciation of the lira is causing for businesses: reduction of rates and taxes and easy access to foreign currency for companies involved in international trade. And it offered savers a new way to maintain the value of their funds: “We are introducing a new financial alternative to ease citizens’ concerns about rising exchange rates.” The new system consists of indexing the lira deposits of natural persons to the dollar, so that the State compensates those who keep their lira savings for a certain period (at least 3, 6, 9 or 12 months), paying the difference between the interest offered by banks and the depreciation of the Turkish currency against the greenback.

“The positive part is that the Erdogan administration cares about the exchange rate and has avoided capital controls. Although Erdogan does not believe in interest rates, he does believe in markets […] At a time when it looked like we were headed for a run on the banks, this move should help stabilize the deposit base,” Ash says.

He knows all sides of the coin in depth.


The announcement led to a massive sale of foreign currencies to be converted into liras, quickly recovering the value of the Turkish currency. The Association of Turkish Banks explained that the equivalent of $1,000 million was acquired, although other sources put the value of the purchases at $1,500 million. According to sources consulted by EL PAÍS, the sale of foreign currency was mainly due to Turkish nationals, although some believe that it was induced by moves in this direction by Turkish public banks, which are firmly controlled by the government.

“It’s a hidden increase in interest. Totally. And taxpayers will pay for it,” says Wolfango Piccoli, co-chairman of financial advisory firm Teneo: “It will mean that taxpayers will end up funding the rich so they don’t lose in the forex market. In addition to the social injustice of Erdogan’s latest scheme, it is important to note that he places all the exchange rate risk on the shoulders of the state, either in terms of futures or through this strange vehicle that replaces interest.”

The idea is not entirely original either, since it was already put into practice in the 1970s, with more than questionable results. The biggest problem economists see, however, is that not only does this not stop the inflationary spiral the Eurasian country finds itself in, but it will help to increase it — in case the lira depreciates against currencies. strong — finally, with the costs of external financing becoming more and more expensive for Turkey, the state will have to print more money to meet the payments.

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