Turkish lira charges back after Erdogan's anti-dollarization plan

Before the announcement, the lira was down more than 10% at an all-time low of 18.4 against the US dollar. Afterward it shot back to as far as 12 and ended the day up 25%.

A US one dollar banknote is seen next to Turkish lira banknotes in this illustration taken in Istanbul, Turkey November 23, 2021. (photo credit: REUTERS/MURAD SEZER/ILLUSTRATION/FILE PHOTO)
A US one dollar banknote is seen next to Turkish lira banknotes in this illustration taken in Istanbul, Turkey November 23, 2021.
(photo credit: REUTERS/MURAD SEZER/ILLUSTRATION/FILE PHOTO)

Turkey's lira gained as much as 15% in volatile trade on Tuesday, having posted a historic rebound from record lows in the previous session, after President Tayyip Erdogan unveiled a plan he said would guarantee local currency deposits against market fluctuations.

The currency opened slightly lower then strengthened to the day's day high of 11.0935 versus the dollar in early trade. It later gave up some of its gains and stood at 13.92 at 0856 GMT.

In a late Monday speech, Erdogan introduced a series of steps that he said will ease the burden of a weakened currency on Turks and will encourage them to hold lira savings rather than dollars.

The government promised to guarantee deposits in lira, sending the currency soaring some 25% -- its biggest intra-day rally on record.

Under the measure, the government promised 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 due to lira depreciation over the years, according to central bank data.

 Turkish President Tayyip Erdogan speaks during a news conference in Istanbul, Turkey October 16, 2021 (credit: REUTERS/MURAD SEZER) Turkish President Tayyip Erdogan speaks during a news conference in Istanbul, Turkey October 16, 2021 (credit: REUTERS/MURAD SEZER)

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

Some $1 billion was sold in markets after the announcement, Cakar said. According to calculations by three bankers, around $1-1.5 billion in savings were converted to lira on Monday night.

But Turkey’s five-year credit default swaps, the cost to insure against a sovereign default, jumped to 613 bps, the highest since May 2020, according to IHS Markit.

The lira has plunged to record lows this year over fears of an inflationary spiral brought on by Erdogan's push for monetary easing, losing about 40% of its value in the past month alone. At its low, it was down some 60% on the year.

"We are presenting a new financial alternative to citizens who want to alleviate their concerns stemming from the rise in exchange rates when they evaluate their savings," Erdogan said after a cabinet meeting, while repeating his defence of a low-rates policy that initially caused the lira's slide.

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.

"How and when is the Treasury going to pay the difference? Is it going to pay once every three months, or once every six months? These are not clear," the banker said on condition of anonymity.

'MOTHER OF ALL RALLIES'

While thee government called the lira's rebound on Monday a major win, economists have repeatedly said Erdogan's economic programme 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 2.2% on Tuesday.

Under pressure from Erdogan, the central bank has cut rates by 500 basis points since September.

Some economists have said the new measures are effectively veiled rate hikes that may not ultimately stem the selling pressure on the lira, while they are putting a strain on the Treasury.

"It can have dangerous consequences," said Refet Gurkaynak, head of Bilkent University's economics department, in Ankara.

Jeffrey Halley, senior market analyst, Asia Pacific, OANDA, said the lira had "the mother of all rallies overnight", but it remained unclear how the government would carry out the new measures.

"A look through the new measures left me scratching my head about how they would ever be enacted and executed, especially in a short time."