The Turkish lira is falling after Erdogan set out to protect his Reuters savings

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© Reuters. PHOTO FILE: Gearbox holds Turkish lira banknotes at an exchange office in Ankara, Turkey, September 27, 2021. REUTERS / Cagla Gurdogan / File Photo

Authors Tuvan Gumrukcu and Nevzat Devranoglu

ANKARA (Reuters) – recovered from record lows in volatile trading on Tuesday after Turkish President Tayyip Erdogan proposed measures to protect local currency savings from such changes.

Late Monday, Erdogan introduced a series of steps he said would ease the burden of a weakened currency for Turks and encourage them to hold lira instead of dollars.

Under Erdogan’s plan, his government has promised to guarantee lira deposits, with the currency rising by about 25% at one point on Monday, the biggest increase in a day.

The Turkish currency, which lost 44% of its value against the dollar this year, first strengthened on Tuesday to a daily high of 11.0935 against the dollar, and later weakened to 14.3885 before returning to 12, 6 at 10.18 GMT.

The government has pledged to pay the difference between the value of savings in pounds and the dollar equivalent of deposits.

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

The lira has fallen to record lows this year amid fears of an inflationary spiral brought on by Erdogan’s pressure on monetary easing. At its lowest level, it fell about 60% year-over-year.

Alpaslan Cakar, head of the Association of Turkish Banks (TBB), said the treasury would cover the costs of the measures, which could prove to be an expensive and inflationary initiative.

About $ 1 billion has been sold in markets since the announcement, Cakar said. The calculations of the three bankers, which are estimated at around 1-1.5 billion dollars in savings, have been converted into lira.

A source familiar with the matter said the measures were taken after the exchange rate reached a “problematic” level, adding that the government would carefully manage the upcoming period.

“The dollar and the euro have risen to the point that they have really formed a bubble. It needed to be intervened in. This situation was not sustainable,” the person said, seeking anonymity.

Finance Minister Nurettin Nebati said details of the new economic scheme would be announced at 11:00 GMT.

Turkey’s five-year credit swaps, the cost of insuring against state default, have jumped to 613 basis points, the most since May 2020, according to IHS Markit.

Meanwhile, the one-month implied volatility of the Turkish lira jumped to 63%, the highest record in history.

(Graphics included, lira volatility reaches record high: https://fingfx.thomsonreuters.com/gfx/mkt/gdpzymlxkvw/Pasted%20image%201640076530130.png)

Presidential adviser Cemil Ertem told Reuters that the moves removed the need to demand individual investors’ dollars, adding that it was a “very important paradigm shift” for the Turkish economy.

The senior banker said infrastructure and regulation would have to be put in place before the deposit guarantee measure can be implemented, adding that it was unclear how the extra money the government would give to the deposit holder would be taxed.

‘MOTHER OF ALL RALLES’

While the government called the lira’s recovery Monday a big victory in politics, economists say Erdogan’s low-interest rate economic program is reckless and expect inflation, which is currently above 21%, to exceed 30% next year.

Turkish energy regulator EPDK has said it has halted planned price increases after the lira rose. Turkey’s main stock index BIST 100 fell 6.12 per cent on Tuesday, prompting switches on the entire index that are temporarily halting trading.

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

Some economists have said the new measures are actually covert rate increases that may not ultimately stop the selling pressure on the lira while burdening the treasury.

“This can have dangerous consequences,” said Refet Gurkaynak, head of the economics department at Bilkent University in Ankara.

Jeffrey Halley, senior market analyst, Asia Pacific, OANDA, said it remains unclear how the government will implement the new measures “especially in the short term”.

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