The Turkish currency — the lira (TRY) — has been increasingly losing value over the last half-century due to a history of typical government currency devaluation. But, this is a longer story for another day. Today, let’s look at the here and now. The period over the last 4 months or so has been a roller coaster ride for the TRY. And yesterday was one hell of a thrill.
Last week, the Central Bank of Turkey slashed its one-week repo auction rate by 100 basis points (bps) to 14%, following a 100 bps cut in November, a 200 bps cut in October, and a 100 bps cut in September. Against the USD, the TRY has lost roughly 40% of its value in this time period. From the chart below, you can see the leadup to the roller coaster ride starting late September. Note that the chart represents USD to TRY, so the higher the value, the worse for the Turkish lira (it’s like a golf score). Right now, ~13 lira = 1 dollar.
The Turkish President, Tayyip Erdogan, thinks he has some magical measure up his sleeve that can protect the currency against its continuing fall. Erdogan thinks that if he can discourage the use of alternative currencies (i.e., the US dollar), then the lira will remain strong. The Venezuelan government believed in the same magic trick, but it didn’t work out so well for them. It won’t work out so well for Turkey either. In fact, the lira has a similar story as that of the Venezuelan bolívar. But again, that’s another story for another day.
Amidst the panic last week as the TRY was quickly losing value against the USD, Erdogan unveiled his magic trick. He told the Turkish people that their savings deposits in lira would be guaranteed. He’s lying, of course, because he cannot defy the laws of reality. Even so, Erdogan’s message injected a ~40% burst of faith in the lira (the sharp drop in the chart below).
But, will Erdogan’s magic trick hold? I’m not a believer. After all, in the same announcement, the president pledged to continue with his low-rates policy.
“We're lowering interest rates. Don't expect anything else from me. As a Muslim, whatever (Islamic teaching) requires I will continue to do that,” he said, referring to Islamic finance in which high interest, or usury, is typically avoided.
Erdogan’s “plan” claims to protect savings from fluctuations in the local currency and claims the government will make up for losses incurred by holders of lira deposits should the lira’s decline against hard currencies exceed interest rates promised by banks.
But, let’s step out of The Twilight Zone for a minute and think. The only way the government can protect savings from fluctuations in the currency is to stop printing the currency. And the only way the government can make up for losses incurred by holders of lira is by printing more currency to pay the difference between the value of savings in lira and equivalent dollar deposits. This will not end the way Erdogan is portraying it will end.
The Turkish people are not dumb. They see through this. This is evident by the fact that more than half of locals' savings is in foreign currencies and gold due to a loss of confidence in the lira after many years of constant depreciation. As of now, the TRY is at ~13 TRY/USD — a considerable increase in value compared to last week where ~18 TRY = 1 USD. But, let’s check back soon to see what the future holds.