12.30 – 18.30 lira trading range for the day.
First, good news that the Erdogan administration recognised the risk to the deposit base and decided to do something about it.
Second, question really whether this is the right solution.
I would argue that this is an overly complex solution to get around the fact that Erdogan hates interest rates and usury.
Does it do anything to support macro demand management? Unlikely not.
Third, lots of details to come out.
Danger here is that Turks borrow cheaply in lira and then deposit in these FX indexed accounts.
The state ends up picking up the tab.
And in effect all this just increases dollarisation as the deposit base either is in FX or now FX linked. And the public purse picks up the bill. Arguably dollarisation shifts from the private to public sector.
There is also talk of new FX linked debt instruments which will increase the FX vulnerability of the sovereign balance sheet – which was already increasing. This increases sovereign credit risk.
Fourth, and will people participate?
Depends why people dollarise. Partly it is as a hedge against inflation and partly due to a lack of confidence in the Erdogan administration. The latter is unlikely to change. Those concerned about inflation and devaluation might well participate.
Fifth, can it be a game changer for the lira. On that score I think exchange rate movements have been so extreme in recent months that exchange rate pass thru and inertia are likely to be extreme. This means that with inflation likely to remain high and sticky the lira will have to remain on a depreciating path to retail real competitiveness. This just builds in a continuous fiscal cost of this new scheme.
The author’s personal views.
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