Erdogan’s risky bluff to save the Turkish lira

Turkey's autocratic president has said the government will guarantee lira deposits against further deterioration in the exchange rate. Few people are convinced by the idea. 

Turkey has found a “sticking plaster” for its currency woes, says Lex in the Financial Times. The country is facing a mounting currency crisis and locals have responded by shifting their savings into other currencies and gold (nearly two-thirds of Turkish bank deposits are held in foreign currencies). So Recep Tayyip Erdogan, the country’s autocratic president, last month announced the government will guarantee lira deposits against further deterioration in the exchange rate. The scheme, designed to encourage Turks to keep their savings in lira, seems to have worked so far – the currency has since rallied 26%. Yet few international investors are convinced by the idea. 

The guarantee means that if the lira lost 30% against the dollar in a year, then a saver with an account paying the 14% base rate would be topped up with the 16% difference by the Turkish state, says The Economist. The move may have prevented a bank run, but in the long-term it only worsens the economic danger. If the lira falls again then the deposit scheme would leave the Turkish treasury “on the hook for hundreds of billions of lira”. A currency crisis could quickly turn into a fiscal headache.

Turkey’s last lira crisis in 2018 was driven by foreign investors fleeing the country. This time, the problem has been domestic capital flight, says Jon Sindreu in The Wall Street Journal. Inflation is soaring and interest rates should rise, yet Erdogan has forced the central bank to cut four times instead. The deposit insurance scheme amounts to a “backdoor” hike, but instead of raising costs on borrowers it is Turkey’s taxpayers who are now “footing the bill”. If the fiscal costs prove unbearable then the banking system, which holds “about a third of the government’s debt”, could be in trouble. “Turkey’s plan to save the lira is a risky bluff”.

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