In a world where central banks now openly engage in helicopter money paradrops and monetizing debt and deficits as far as the eye can see (knowing well that such actions always end in hyperinflationary tears but plowing on nonetheless), i.e., funding their respective governments, the literal printing of money by central banks to fill Treasury coffers is not nearly as exciting as it used to be. However, one place where money transfers from the central bank to the government (which in this particular case is represented by just one particular kleptocrat) are those in Turkey due to the absolute banana republic nature of the country, and which is closer than any other semi-developed nation to sliding into the hyperinflationary abyss; as such as all of its bizarre actions are scrutinized by a small group of fascinated onlookers who then try to extrapolate the Turkish experience to every other insolvent nation.
Well, speaking of bizarre actions, an especially egregious one took place on the final day of 20021, when Turkey’s central bank posted an extraordinary and unexplained daily profit of around $10 billion, sparking questions on what caused this overnight boon that will trickle down to the nation’s Treasury.
According to Bloomberg, the monetary authority disclosed an annual loss of around 70 billion liras ($5.2 billion) on Dec. 30 but just one day later, ended the year with 60 billion liras of profit, an unprecedented change of fortunes in a single day, according to its daily balance sheet. In February, the Ministry of Treasury and Finance — as the central bank’s biggest stakeholder — will begin collecting much of that sum as dividends. The biggest winner? Recep Tayyip Erdogan himself – after all he is the de facto government of Turkey – because in February, the Ministry of Treasury and Finance both of which are populated with Erdogan cronies and are the central bank’s biggest stakeholders, will begin collecting much of that sum as dividends.
The bizarre and unexplained “profit” came after President Erdogan unveiled measures meant to compensate lira investors for any losses, a move which sparked a furious surge in the lira which however was also catalyzed by a huge buying spree by the central bank which rushed to stabilize the lira, effectively leaving itself without net FX reserves. Even with this gross manipulation the Turkish currency slid 44% against the dollar last year, largely as the central bank – egged on by Erdogan – slashed its benchmark rate by 500 basis points since September, a move which we contend is part of Erdogan’s master plan to leave the Turkish economy in ruins so that his own personal embezzlement of billions can not be traced.
Meanwhile, as discussed yesterday, the lira’s collapse fueled an explosion in inflation, with Turkey’s CPI ending the year above 36%, the highest level since September 2002. The result has been a plunge of Erdogan’s popularity as 2023 elections approach, and speculation among some that Erdogan is rushing to pillage the rest of Turkey’s wealth before he disappears forever.
According to Bloomberg, the central bank declined to comment on the dramatic move on its balance sheet, which was first reported on Monday by the bank’s former deputy governor Ibrahim Turhan and ex-banker Kerim Rota, both members of the opposition Future Party. According to Turhan, one possible explanation for the sizable overnight profit boost could lie in the sale of foreign-exchange reserves to the Treasury, in other words, the central bank is giving dollars to Erdogan.
The lira’s depreciation makes foreign reserves more valuable in local currency, but that can’t be logged in the profit column until the reserves are sold, he said. The same amount of dollars would then have to be bought back to maintain the reserves level, Turhan said. In other words, the central bank will have to purchase billions of dollars, a move which would send the lira crashing, but that of course assumes that Erdogan has some interest in preserving normalcy in his fiefdom, which by now everyone knows he does not.
Erdogan, who has attacked elevated borrowing costs as a brake on economic growth, pledged to remove the “bubble” from inflation in a speech on Tuesday, calling exchange-rate fluctuations and “excessive” price increases “thorns” on Turkey’s path. His policy of cutting rates to bring down inflation goes against mainstream economic thinking.
Meanwhile, even with “guaranteed” returns on lira deposits, Turkish investors are still holding on to foreign currencies, undermining the Turkish leader’s plan to support the lira without raising interest rates. According to a separate Bloomberg report, companies boosted their foreign-currency holdings by around $1.6 billion in the seven days through Dec. 24, taking advantage of a rally that saw the lira almost double in value that week. While households trimmed their positions by just over $100 million, it hardly put a dent in total foreign-currency deposits, which rose to a record $239 billion, according to the latest central bank data.
This dash for dollars in Turkey (and gold, and bitcoin) is a symptom of a monetary policy that for years has remained far too loose to put a lid on inflation and as a result debased the lira, but more importantly it highlights the challenges authorities face in convincing investors to shift their savings into the local currency, which has lost more than 85% of its value against the dollar since 2012.
“The reason why people accumulated foreign-currency up until today was distrust, and the trust issue is still there,” said Evren Kirikoglu, an independent strategist based in Istanbul.
As a reminder, instead of raise rates to lure savers into lira accounts, the government came up with some Frankenstein quasi hike according to which it will compensate lira holders for any currency losses that exceed the interest rate on their short-term deposits — currently languishing around 19% points below headline inflation. Of course, good luck trying to make sense of such a purposefully opaque mechanism.
And while the official narrative has been that this new financial instrument is a game changer – because it will sap demand for dollars and euros that has weighed on the currency, and at the same time allow for rates to remain low and spur growth – the reality is just the opposite, and while appetite for Erdogan’s bizarre product remains virtually non-existent with just 84 billion liras ($6.3 billion) out of a total of 5.2 trillion liras of deposits moving into new foreign-currency linked deposits, the bulk of funds continues to flow out of lira and into foreign FX accounts.
“People don’t seem to understand the new product and they are afraid that some future changes could prevent them from buying back the FX they sold,” Kirikoglu said, referring to dollars and euros they parted with to place money in these new lira accounts.
Instead, as Bloomberg reports echoing what we said in December, the latest official reserves data suggest interventions in the currency market may have played a far larger role in spurring the recent advance in the local currency. In other words, if it wasn’t for the continued drain of dollars by the central bank, the lira would be trading at hyperinflationary levels.
As we extensively documented, last month the lira surged by as much as 79% from a record low of 18.3633 on Dec. 20 to a more than one-month high of 10.2512. That coincided with a previously noted $3.53 billion drawdown in the central bank’s net currency reserves in the week that ended Dec. 24, taking a drop since the end of November to $16 billion.
Alas, none of these tactical short squeeze attempts change the dire fundamental picture: with inflation running at over 36% and Turkey’s official reserves dwindling, the question for some is how much longer policy makers can stand in the way of dollar demand.
The size of recent interventions is reminiscent of operations carried out between 2018 and 2020, when state lenders routinely flooded the market with dollars unannounced to support the lira. The government has denied reports of so-called backdoor sales.
Luckily, at the current pace of interventions, the central bank will soon be out of manipulation firepower. Turkey’s gross reserves stand at $110.9 billion. Yet net reserves, which many economists use as a gauge of how much firepower policy makers have at their disposal, is now just $8.6 billion, meaning that Erdogan has at most 2-3 weeks left before he loses all control of the lira.
“I assume people won’t be rushing to dollars anymore but the key point is to attract FX holders to the system, otherwise the central bank cannot continue to meet citizens’ FX demand with its reserves,” Kirikoglu said.