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The Turkish lira recovers its value at the beginning of the month after the announcement that savers will be compensated

If Turkish soap operas have accustomed us to a roller coaster of emotions per episode, the currency of the new homeland of soap operas has decided to follow a similar script: after depreciating 10%, until reaching new historical lows during the Monday, it recovered 60% of its value overnight – the highest rise in the lira in the last four decades – after the Government's announcement of extraordinary measures, opened Tuesday's day in green, to plummet 20% down and then appreciate again. The result is that it has recovered the value it had at the end of last month (12.7 lire per dollar and 14.3 per euro), although it is still 40% lower than at the beginning of the year.

In his speeches, Turkish President Recep Tayyip Erdogan usually boasts of economic knowledge – he has a university degree in business management, although some believe it to be false – but what he is really good at is politics, the handling of the times, the rhetoric. Because what he has done to recover the value of the lyre is a sleight of hand that has astonished observers – “he has pulled a rabbit out of his hat,” argues analyst Timothy Ash, from the BlueBay fund – and that, despite everything has worked. At least for the moment.

Erdogan has been involved in a crusade against interest rates for years and, since September, has forced his Central Bank to reduce them from 19% to 14% while the rest of Central banks of the world take the opposite path in anticipation of the effects of the tapering of the US Federal Reserve and similar measures in the Eurozone. Erdogan maintains, against the majority of economists, that “interest is the cause of inflation, not its consequence” and, since he is an Islamist and the Koran prohibits usury, there is no going back in this policy of lowering rates. In reality, more than religion or ideology, in his policy there is a strategy of overheating the economy to the maximum through a credit bubble that encourages production and exports, and thus achieve high rates of GDP growth and get his re-election as president in the 2023 elections.

However, the consequence of these policies has been runaway inflation (21% according to the official statistics institute and more than 50% annually according to calculations by the statistics office of the Istanbul City Council and independent academics), which has left real banking interests in negative territory. This has caused a flight of Turkish investors and individuals, who in the last month have dumped the lira by the handful – 64% of the volume of Turkish bank deposits is in dollars or other hard currencies – a panic that in the The last few days had brought the lira to record lows.

On Monday, on the other hand, Erdogan announced extraordinary measures to mitigate the problems that the depreciation of the lira is causing in companies: reduction of rates and taxes and easier access to foreign currency for companies involved in international trade. And he offered savers a new method to maintain the value of their funds: “We present a new financial alternative to alleviate citizens' concerns regarding the increase in exchange rates.” The new system implies indexing to the dollar the deposits in lira of natural persons, so that the State will compensate those who keep their savings in lira during a determined period (at least 3, 6, 9 or 12 months), paying the difference between the interest offered by banks and the depreciation of the Turkish currency compared to the greenback.

“The positive part is that the Erdogan Administration is concerned about the exchange rate and has avoided capital controls. Although Erdogan does not believe in interest rates, he does believe in markets At a time when it looked like we were heading into a banking panic, this move should help stabilize the deposit base, ”says Ash.

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The announcement led to a massive sale of currencies to convert them into lira, which made recover quickly the value of the Turkish currency. The Association of Turkish Banks explained that the equivalent of 1,000 million dollars was acquired, although other sources raise the value of the purchases to 1,500 million. According to sources consulted by EL PAÍS, the sale of foreign currency was mainly due to Turkish nationals, although some believe that they were induced by movements in this direction by Turkish public banks, firmly controlled by the Government.

“It's a hidden interest rate hike. Completely. And it will be paid by the taxpayers, “says Wolfango Piccoli, co-president of the financial consultancy Teneo:” It will mean that the taxpayers will end up financing the rich so that they do not lose in the currency market. In addition to the social injustice of Erdogan's latest scheme, it is important to note that it puts all the exchange rate risk on the shoulders of the State, either in terms of futures or through this strange vehicle that replaces interest. ”

The idea is not completely original either, since it was already put into practice in the 1970s, with more than questionable results. The biggest problem that economists see, however, is that not only does it not stop the inflationary spiral in which the Eurasian country finds itself, but it will contribute to increase it – in case the lira depreciates against the hard currencies, well, With the costs of external financing increasingly expensive for Turkey, the state will have to print more money to meet the payments.

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