Turkish lira viphs after Erdogan moved to protect savings

  • Erdogan announced new measures to promote lira savings
  • The lira reached a 25% rally from an all-time low
  • Evidence suggests that steps are required after ‘unstable’ FX levels
  • Economists warn of inflation risks

Ankara, Dec. 21 (Reuters) – The Turkish lira returned from a historic fall in volatile trade on Tuesday.

Erdogan introduced a series of measures late on Monday that he would ease the burden of the weak currency on the Turks and encourage them to keep the lira over the dollar. read more

Under Erdogan’s plan, his government promised to guarantee deposits in the lira, raising the currency by 25% at one point on Monday, sending its largest intra-day rally.

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Analysts and bankers have warned that the government will seek to offset future losses based on the exchange rate if the lira rally backfires. It could also trigger already high inflation. read more

The Turkish currency, which lost 44% of its value against the greenback this year, strengthened to a daily high of 11.0935 against the dollar on Tuesday and then weakened to 14.3885 before hovering at 13.1 at 1417 GMT.

Indirect fluctuations in the lira – or expected price fluctuations – peaked at the record, reflecting uncertainty about the plan even as the Treasury provided some details.

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

According to central bank data, more than half of locals’ savings are in foreign currencies and gold, which lost confidence in the lira after years of depreciation.

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The currency has fallen to its lowest level this year on fears of an inflationary cycle driven by Erdogan’s drive for devaluation. At its lowest level, it is down 60% year-on-year.

An informed source in the case said the measures were decided after the exchange rate hit a “critical” level, adding that the government would carefully manage the coming period.

“The dollar and the euro have really risen to the point of creating a bubble. We need to intervene. This situation is not stable,” the person demanded anonymity.

On September 27, 2021, a money changer holds a Turkish lira in a currency exchange office in Ankara, Turkey. REUTERS / Cagla Gurdogan / File Photo

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

Meanwhile, the one-month volatility in the Turkish lira rose to 63%, the highest on record.

The lira fluctuation hit the record

The new tool for lira savings by retail investors will be available with a maturity of three to 12 months, with a minimum central bank policy rate deposit yield, the finance ministry said. read more

Presidential Adviser Semil Erdem told Reuters that the move had eliminated the dollar demand from individual investors, which was a “very important precedent change” for Turkey’s economy.

‘Mother of all rallies’

Despite the government calling Monday’s lira resurgence a major victory in policy, economists say Erdogan’s economic plan based on low interest rates is irresponsible and inflation, currently above 21%, could reach 30% next year.

Turkey’s EPDK energy regulator said it had suspended planned price hikes for the time being after the lira rally. Turkey’s major BIST 100 stock index fell 7.66% on Tuesday.

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Under Erdogan’s pressure, the central bank has cut rates by 500 basis points since September. The president has promised to continue his low-fee policy, including on Monday.

Some economists have argued that the new measures are effectively covert rate hikes, which will not ultimately deter selling pressure on the lira, while at the same time putting pressure on the treasury.

Refed Gurgenak, head of the economics department at Billkent University in Ankara, said: “This could have dire consequences.

Jeffrey Haley, senior market analyst at Asia Pacific, OANDA, said it was unclear how the government would take new action “especially in the short term.”

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Additional report by Orhan Coskun in Ankara, Ebru Tuncay in Istanbul and Davide Barbuscia in Dubai; Editing: Jonathan Spicer, Sam Holmes, Ana Nicolaci da Costa and Alexander Smith

Our standards: Thomson Reuters Trust Principles.

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