3. What does it mean for inflation and public finances?
Potentially, the Treasury takes on foreign-currency risk of 3.3 trillion liras ($265 billion) now deposited in retail banking accounts. If the lira depreciates beyond deposit rates, that would impose a burden on the budget. If the central bank prints money to make up the difference, then inflation would spike.
4. Does this plan address the crux of the problem?
While the worst may be over for the lira for now, with some confidence restored among retail depositors, “until interest rates provide a credible anchor against inflation, the lira will tend to be volatile and subject to downward pressure,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. Much will also depend on whether depositors believe the policy can actually be implemented, according to Brendan McKenna, a currency strategist at Wells Fargo in New York. “Right now, Turkish institutions don’t have a ton of credibility, so there may be challenges getting lira depositors on board,” McKenna said.
A commitment to ensure retail depositors are made whole regardless of currency volatility is an attractive offer and was behind the massive short covering rally in the Turkish Lira yesterday. A grand gesture was necessary because the central bank intervention earlier this month did not gain traction and the Lira’s accelerated decline persisted.Click HERE to subscribe to Fuller Treacy Money Back to top