Last week Turkish president Erdogan revealed his Government’s “whatever it takes” scheme to halt the depreciation of Turkish Lira. He pledged to make whole losses linked to inflation for Turkish citizens, and initiated a massive intervention in FX by the Central Bank. These moves sparked the biggest surge in Lira’s history as it was about to fall into hyperinflation mode.
However, the honeymoon seems to be over. In the last three days, the Turkish Lira has fallen again amid what seems to be renewed demand for dollars, even as the Central Bank continues to intervene in the FX markets, and there is an ongoing ‘patriotic’ campaign to convince Turkish citizens to not buy foreign currency.
The Turkish Lira traded 6.54% lower at 12.52 per dollar, taking its 3-day move to almost 20% higher after enjoying a historic surge just a week ago amid a furious short squeeze. Even with the recent slide, the USDTRY is still down 24% from where it traded early last Monday, ahead of the unprecedented fireworks.
Last week Erdogan introduced FX-linked deposit accounts aimed at protecting lira savings from the currency’s decline. The monetary authority published its annual policy text today, stating that inflation targeting will continue in 2022, while a 5% medium term inflation target is maintained. Of course, real inflation in Turkey is now well over 21%.
Critics fear that Erdogan has managed to launch the infamous “Doom loop” which plagued Europe for so long by linking weakness in FX to weakness in bonds, creating a procyclical nightmare for policymakers.
Why this matters? If the Turkish Lira selloff accelerates, it will immediately lead to higher yields, which in turn will lead to an even lower currency and so on until the entire Turkish economy implodes.