Page 17 - TURKRptFeb22

Let’s take a 3-month maturity scenario as an example: on December 29, a lira deposit holder turned their TRY100-equivalent deposit into an FX-guaranteed lira deposit with a 17% rate. The central bank’s USD/TRY rate stood at 12 and their money is worth about $8.
By March 29, she has earned 17% interest for three months, meaning her deposit now stands at around TRY104.
If the central bank rate is below 13, this is her money as TRY104 would make more than $8.
If the central bank rate is above 13, the Treasury will make up the difference to raise the amount to $8. Let’s say the rate is 14. $8 makes TRY112. The Treasury must pay TRY8.
This is what’s called a naked call option. The Treasury sells it at a zero premium. The risk is unlimited as the exchange rate can theoretically soar into infinity.
Additionally, this is actually fuelling dollarisation with linking lira deposits to the dollar. However, they will be booked as lira on bank balance sheets and an accounting make up is aimed.
At the end of the day, it is unknown whether a significant number of deposit-holders will make use of this instrument.
The current finance minister and Erdogan provide some figures on the so-called FX-guaranteed lira deposit scheme.
On January 27, the central bank governor joined them and he provided the latest figure. Accordingly, a total of TRY209bn has joined the scheme, $4.7bn of which was turned from FX-linked deposits.
The Erdogan regime has no chance of succeeding with any policy here, if its moves can be taken as policies.
First and foremost, no one has any trust in the Erdogan regime. The instrument could even trigger a bank run as the central bank is taking steps to push returns on FX-linked deposits to negative by increasing required reserves. By April 15, banks should convince their deposit holders to turn over at least 10% of their overall FX deposits to the FX-guaranteed lira deposit scheme or they will pay a 1.5% commission that would be imposed on FX required reserves.
Secondly, the interest rate is low. At the end of the maturity, if the government can manage to successfully pressure the USD/TRY, the deposit-holder will earn 17% interest. Official end-2021 inflation is expected to come in at 30%.
Thirdly, if the deposit-holder wants their money back before maturity, the lower of the rates taken from the day of depositing the money and the day of withdrawing the money will be used. So, if we go back to the example above: On January 29, if the central bank’s USD/TRY rate stands at 13, the deposit-holder will receive her money back at the 12 rate.
- Meanwhile, the central bank will provide a guarantee against lira depreciation to FX and gold-linked deposit holders if they turn to FX-guaranteed Turkish lira deposits.
The chaos surrounding setting the rate, which will be taken into
17 TURKEY Country Report February 2022 www.intellinews.com