The last-ditch plan to lift the Turkish lira out of the abyss

Posted on Dec. 2021 at 12:00Updated 21 Dec. 2021 at 12:05

A textbook case. Turkey is experiencing the perfect currency crisis, as described in economics textbooks. All the ingredients are there: incoherent economic policy, loss of credibility and independence of the central bank and total distrust of the markets.

The country has paid a heavy price. Inflation is soaring, the flight of foreign capital is accelerating and the Turkish lira kept plunging until Monday. The indifference to its fate displayed by the government and the lack of means of the central bank to support it have suggested to the markets that the fall of the currency had no limit. All Turkish assets (stocks, real estate, etc.) are sold off and very cheap for foreigners with a risk of takeover bids (takeover bid) on the country’s economy.

Earlier this week, with its back to the wall, the Turkish government launched its faint hope plan to get its currency and economy out of the abyss. Surprised by this voluntarism, the market was taken aback. On Monday, the Turkish lira soared 34% – up 56% from its low. However, it lost ground again (around 3%) on Tuesday against the dollar and the euro.

Whatever the cost

President Erdogan has endorsed the “whatever the cost” strategy. Among the measures put forward, the government will protect savers against the exchange risk of its currency. “From now on, none of our citizens will need to switch their deposits into pounds in other foreign currencies because of fears about the exchange rate”, hopes President Erdogan.

Supporting individual currency losses will come at a cost to public finances if the pound’s downward movement picks up and causes further concern. The government wants to give the impression that the decline has come to an end in order to stop the rush of individuals for the dollar and try to restore confidence in their currency. The dollarization of the economy and the financial system has accelerated since September, leading to a risk of loss of monetary sovereignty, with a new unofficial benchmark currency, the US currency.

Stratospheric volatility

The government will also help Turkish companies in their management of the stratospheric volatility of their currency. He wants to encourage foreign investors, very little invested in Turkey, to invest again in the country and in particular in the State debt. He assured them that he did not intend to introduce capital controls, nor to move away “in the slightest from a market economy”.

In a more mysterious way, President Erdogan had mentioned, Monday, 5,000 tons of gold (jewelry, ingots …) which would sleep “under the mattresses” of the Turks. The precious metal is a safe haven and protection asset in a country where inflation is soaring and could reach 30% in 2022.

Historic fall

Despite its spectacular recovery, the Turkish lira still shows the worst performance in the emerging sphere. It has lost another 38% since the start of the year against the dollar, which stands at around 14 pounds. He had reached a high of 18.36 pounds. The euro registered at 15.90 pounds and the Turkish currency lost another 34% against its European counterpart. The European currency had exceeded 20 pounds (20.74) before falling sharply. 2021 is expected to be worse than 2018 when the pound plunged 28%.

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