Bill Mitchell-en Turkey – who is squeezing who?
(http://bilbo.economicoutlook.net/blog/?p=48910)
… the latest from Turkey … The mainstream narrative against Modern Monetary Theory (MMT) has been ramped up significantly in recent weeks as a result of events in Turkey, where, up until yesterday, the currency had depreciated significantly. The screams for interest rate rises from bankers etc (of course! they profit or protect foreign debt exposure) have been deafening. But the most recent monetary policy decision was on December 16, 2021, when the CBRT reduced its policy rate (the one-week repo auction rate) from 15 per cent to 14 per cent. The ‘markets’ can’t really get a handle on the current government’s thinking because it is running against the mainstream in several ways, including cutting rates to reduce inflationary pressures (see Press release on Interest Rates – from the CBRT). Overnight a big swing happened after the government made a significant fiscal policy announcement. That will further confound the markets who were forced to scramble to close out short-selling positions as the lira appreciated by around 25 per cent in one day. The fiscal squeeze worked. You couldn’t make this stuff up.
Turkish lira appreciates sharply
I wrote about the situation in Turkey on Monday – Turkey tells us nothing about MMT – but MMT tells us a lot about why Turkey is in trouble (December 20, 2021).
Predictably, the Twitter heroes were out in force restating their assertions that the situation proved Modern Monetary Theory (MMT) was flaky.
They didn’t address the analysis I provided at all. That would be too inconvenient for their story line.
One character claimed that my implication that the IMF intervention in the first decade of this century was part of the story was far-fetched and typical ‘leftist’ delusion.
How did he reach that conclusion?
Well the last formal IMF program (standby arrangement) ended in May 2008, so how can I claim that in 2021, the IMF is implicated?
Easy.
The IMF intervened with a Standby Arrangement that began on February 4, 2002 (ending February 3, 2005). A new Arrangement followed on May 11, 2005 which ended as noted on May 10, 2008.
… those programs forced a range of structural changes onto the Turkish economy which persist today.
They set in place the export-led growth strategy (which Erdogan still favours).
The financial market deregulation and the privatisation of many state enterprises including banks occurred during those Arrangements.
The reliance on large foreign currency-denominated debts accelerated as a consequence of the deregulation and reduced oversight.
The propping up of the banks through artificially high interest rate regimes managed by the central bank became the norm during those periods and persisted.
Sure enough, the policy stance is shifting as Erdogan approaches the next election and starts to assert a defiance to the mainstream macroeconomic policy mantras.
But the major shifts that occurred during those IMF programs set Turkey up for the issues it faces now.
That is undeniable.
So to dismiss the observations as ‘leftist’ delusions just shows the commentator really has no idea despite regularly tweeting a lot of gobblegedook about margins, fx rates, and all the rest of the financial market talk.
Anyway, since I wrote that blog post, the Turkish government has announced a major new fiscal initiative.
Among other things, the President announced that the Treasury (fiscal policy) would restore any losses that lira-denominated bank deposits held by citizens incurred as a result of the exchange rate shifts.
(ii) Politika fiskal ‘berria’: liraren depreziatzea
How would that work?
Assume the banks are paying 14 per cent for a 12-month lira deposit. If the currency depreciated by say 15 per cent then the Treasury will pay the difference.
That means that people who currently hold, say USD, can shift their funds into lira with a guarantee of no exchange rate exposure.
At my last estimate, around one-half of bank deposits in Turkey are denominated in foreign currencies (USD, euro, etc).
So essentially, the Government is assuming the exchange rate risk, which is a significant intervention.
And within a day, this is what happened in the foreign exchange markets.
Today, the lira is back to where it was at the start of December.
It depreciated 35 per cent between December 1, 2021 and December 21, 2021, but on December 22, 2021, it appreciated 25.4 per cent over the 24 hours.
No interest rates were raised by the central bank (CBRT). The most recent monetary policy decision was on December 16, 2021, when the CBRT reduced its policy rate (the one-week repo auction rate) from 15 per cent to 14 per cent.
The shift was provoked by the fiscal policy announcement.
The financial markets commentary today is full of investment bankers still claiming that interest rates have to rise.
Of course they say that – the institutions they represent make larger profits if rates rise and they are also wanting to protect foreign debt exposure.
The interesting thing is that this announcement has interrupted the speculators who had bet short against the currency.
The trading volumes today suggest a lot of loss-making positions are being closed out quickly (to limit the losses) as a result of the reversal in the lira.
It is an interesting story.
