Odd Lots - Understanding Turkey’s Bold Plan To Stabilize the Lira

Episode Date: January 3, 2022

The Turkish lira was incredibly volatile in 2021. After getting crushed and falling to record levels, it bounced back in the middle of December after the government announced an unconventional plan to encourage Turkish citizens to keep their money in lira rather than converting to dollars. But how does it work? And can it actually work over the long term? On this episode we speak with Lütfullah Bingöl, an economist at Albaraka Türk Katılım Bankası on how the program might actually work. He likens the program to a free lira put option offered to people who keep their money in the domestic currency.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. It's pretty incredible how like every, you know, for the last several years, maybe five, six, seven years, I feel like there is this rhythm where maybe like every nine months or every year, the world. really turns its focus to what's going on with Turkey, what's going on with Turkish monetary policy, and what's going on with the lira. Yeah, I know what you mean. It does seem to pop up like at least once a year and suddenly everyone's very focused on it.

And then within a month or two, people seem to have forgotten it or at least it's moved out of the limelight. But I have to say, we're recording this on Christmas Eve, December 24th. And this week in particular has been one of those. weeks where everyone wakes up and decides that they all have opinions on Turkey and what's going on there. And to be fair, we have seen this enormous amount of volatility in the lira. So I think the lira was up something like 25% on a single day this week after Erdogan announced a new mechanism to try to stop its halt. And before that, it was down, I think it had lost like half its value over the past three. three months. So just crazy moves in the currency. Yeah, right. There are a lot of EMs which see

significant currency volatility. You know, we see it in Brazil from time to time. We see it in South Africa and so forth. But there seems to be nothing quite like the volatility that we see in the lira. And it's incredibly volatile. And as you mentioned, and you said the lira rarely 20% a day, I think it was up like 35% from the lows of that day because I think in the morning it was down 10%. But as you mentioned, President Erdogan having instituted a new mechanism to attempt to stem the decline. And we'll get into how that works. I think it was up 35%. Like truly any sort of like macro-terrorist, anybody who's interested in currencies, monetary policy, et cetera, had to be sort of like jaw-dropping at that move that day.

Right. And the other thing going on with Turkey, of course, is this, I guess, rejection of economic orthodoxy. So when it comes to emerging markets, I think there's often a perception that, you know, EMs are different to developed economies for a variety of reasons. But there's always concern about fiscal discipline and whether or not they're going to be conservative, whether or not they have the institutional strength to, you know, keep the economy in check and keep it stable. And then when it comes to Turkey, we've seen just, I guess, an extreme version of these concerns where Erdogan is rejecting economic orthodoxy. He keeps lowering interest rates, and that's leading to inflation, and that's causing the currency

to fall. And no one really knows how to interpret it, I guess. Yeah, I think that's exactly right. And you see it from time to time that various EMs will say have a central banker who is very steeped in sort of neoclassical economics. And whether the sort of measures are successful or not, there's always this sort of, there's often this sort of portrayal to foreign investors of like fiscal discipline and central bank independence and macroeconomic orthodoxy. And I think, you know, people look at Turkey and they see an example of a country. and a system that's very much not playing by those sort of like the standard playbook. And then they see the volatility.

And they say, oh, well, this is what happens when you don't, when you don't follow the rules laid out by the University of Chicago Economics Department. Yeah. That's one way of putting it. Yeah. Anyway, but I still, you know, again, I sort of imagine like, you know, so many, like tourists look at Turkey. And I don't think we have, like, a truly deep understanding of what is going on in the economy.

the approach to monetary policy, what is going on with the lira and so forth. So I'm very excited about our guest today who is going to help us understand everything about how the Turkish economy and monetary system works. We're going to be speaking with Lutfila, Bingle. He's an economist at a bank in Istanbul, Al-Baraka Turk. Lutfala, thank you so much for joining us. Thanks for having me, Jerry. So why don't we start?

I mean, would you say it's a fair characterization, this is. idea that in a very, Turkey in a very sort of overt sense does not sort of make the same, I guess, say, yeah, want to play by the same playbook as many emerging markets typically attempted. There are some similarities with some periods with some countries, but Turkey has some very unique fundamental conditions. Some of these are issues and some of these are strengths. And Turkey, Turkish economy is, of course, bound by these. That is why sometimes Turkey makes different choices than the rulebook. I'm not even sure a proper rulebook exists for emerging markets.

Right. But that will be one of my arguments today. There is no rulebook for what Turkey goes through. And there will be one if this instrument works. You're talking about the attempt to stabilize the lira that was announced this week. But before we get to that, can I just ask a really basic, and I guess this is the obvious question, but what is with all the interest rate cuts? Like, where does the refusal to actually raise interest rates come from?

And what's the rationale for going in that direction? To answer that question, I'm going to have to provide an entire framework, which I was planning to do any way. So should I go ahead and do that? Yeah, please, go for it. First off, it's going to sound like a cliche, but I do not believe in structures or, you know, claims. I believe in incentives. And for various reasons I'm going to talk about today, the central banker's goal of price stability and the policymaker's goal of, you know, having growth, providing jobs, those are two conflicting goals in the case of Turkey. And that is for

precisely one reason because there is a huge amount of dollarization. Right. And that is precisely why I do not see this week's move as just a short-term measure to, you know, stabilize the lira. I see it as a crucial structural reform. I began this week extremely pessimistically. I had almost no hope. But now I'm rather hopeful because what they announced,

tells me that they diagnose the problem right. And if the mechanisms announced work, we won't have that problem anymore. So for the first time in probably Turkish history after the end of Bretton Woods, perhaps, we will have a proper alignment of incentives. So I think I will have answered the question why the policymakers, you know, add fuel to the fire whenever there is a global U.S.D cycle downturn, whenever Fed hikes interest rates, you see central bank independence in Turkey disappear. I'll try to explain why is that. So why do we get it? Just give us this sort of basic argument for, because I think from a sort of like

foreign perspective, the typical story is Erdogan is pushing this sort of like very heavy It's unusual policy. It's not out of the central bank or playbook. It's bad. It weakens the lira. People flee to dollars and so forth. And it leads to inflation and price instability. It sounds like your argument is that it's something much deeper and much more structural with the Turkish economy and that it can't simply be attributed to these sort of idiosyncratic policy choices. So before we even get into the mechanism and we'll talk about that, of course, what is it about the structure of the Turkish economy, in your view, that creates these cycles? There are three types of flows that are inconsistent with each other.

So you have dollarization, you have the current account balance, and you have the foreign capital inflows and outflows. There is no single interest rate that can balance all three of these in the case of Turkey. So whatever you do, you'll set. sacrifice something. And in the case of Turkey, if given this structure, if you don't change anything, you take this as given, if you aim for price stability and the global central banks, especially Fed, is hiking interest rates. So you do not have that much capital flows. You do not receive that much capital flows. There is no way you can grow, basically. That

will be my argument in any policymaker anywhere in living in a democracy. Once the economy to grow. And if something is standing in the way of that, that thing will be run over. That is what's happening in Turkey. And if dollarization issue gets resolved, I think you'll see everyone talking about interest rates a lot less. Canadian women are looking for more. More to themselves, their businesses, their elected leaders, and the world are out of them. And that's why we're thrilled to introduce the Honest Talk podcast. Jennifer Stewart. And I'm Catherine Clark. And in this podcast, we interview Canada's most inspiring

women. Entrepreneurs, artists, athletes, politicians, and newsmakers, all at different stages of their journey. So if you're looking to connect, then we hope you'll join us. Listen to the Honest Talk podcast and IHeart Radio or wherever you listen to your podcasts. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gura. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews.

All the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead.

Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. Just before we move on, can you talk about how dollarization became, a thing for the Turkish economy because of course there are a lot of emerging markets that

have dollarization to some degree. They have people who, you know, don't necessarily trust the local currency and want to shift into something that they perceive as more safe or they have a lot of, you know, trade that's denominated in dollars, things like that. But in Turkey, as you just laid out, it seems to be extreme or it seems to be more of an issue because of the structure of the economy. So how did that happen? It started with a very premature capital account opening done by the late president, Torqu Dozel, in 1989. With that capital account opening, he also let people have FX deposit accounts in local banks.

So that's how it started. And throughout the 90s, there was this predictable pattern. Whenever there was something wrong with the Turkish economy, you know, USD, Lira Exchange, it blew up. So if you are a household, if you're a person observing this pattern, this means you have now access to a put option. That's pretty much it in the case of Turkey. I argue the main reason for dollarization is that that's the only tail event hedge a household has access to. and that's what makes this problem hugely pernicious because if you treat it like some sort of simple portfolio choice and try to solve it that way, it doesn't work.

And I'll tell how they treat it that way and it didn't work. And now for the first time diagnosing the problem right, that dollarization, households holding dollars is a tail event hedge. And unless you completely replicate the payoff structure of that tail event hedge, there is no way you can prevent dollarization, you know, barring capital controls or something. So this is the first credible attempt to do that, I think. That's what I meant by they seem to be diagnosing a problem right. What do I mean by you can't solve this problem by treating it as a simple portfolio choice issue? Yeah. If this is another risky asset, what do you do?

You hike interest rates, right? You make the alternative more preferable. You should be able to solve your problem, right? But that does not work in the case of Turkey. Whenever you hike interest rates, if other uncertainties are still there, households do not just go ahead and buy lira. They hold on to their dollars and they buy even more if the uncertainty is extreme. And another issue is if there is a momentum in USD-Lyra exchange 8, you see households buying more.

That is typical for the case of a put option. Right. But if it was a simple sort of portfolio choice, there is a chance you might observe that, but it should not be this predictable. So I think one major difference is, let me give you an example. Let's say Tesla wants to dissuade put-option buyers in its stock from buying put-options. And to do that, if it's increased its dividends, would it work? I think not because a put-option is a tail-event hedge.

and increasing dividends does nothing to that. I mean, it would weaken Tesla's balance sheet. It would, yes. I mean, that was one of the things that happened in Turkey as well. It would do nothing to Tesla put buyers. So if you want folks from, you know, if you want to prevent folks on buying Tesla puts, you have to somehow replicate that payoff structure

or remove uncertainty completely, but removing uncertainty completely means you can't grow either. And I'm not sure if that's something you want. I mean, providing a stock that is completely, you know, trading with a fixed price would solve that issue. But would you want that? I think not. So I think that's a good example of what we're dealing with here. Before we go on, I just want to clarify this because I think this is important to understanding your argument.

So in a typical sort of like portfolio channel, you like raise the interest rate and that creates some sort of like marginal incentive to hold lira. But if people are holding dollars as a tail risk hedge, then it really doesn't solve the problem. Can you just explain a little bit further this idea, the tail risk hedge against what? And you sort of mentioned the premature opening of the capital account in the late 80s, but what is the impulse to hold such a strong. tail risk hedge and how is this not previously appreciated by policy the dynamic of that previously appreciated by policymakers let me describe what happened when they tried to hike rates to solve this issue and for a while it looked like they solved this issue and after the 2001 crisis in Turkey there was this IMF structural program and you know the primary objective of that

program was to decrease inflation, you know, control inflation. And to do that, you have to provide some sort of currency stability. And one of the major roadblocks in front of that was dollarization. And it did something else as well. Dollarization weakens the monetary transmission mechanism. So you're hired the dollarization. Your monetary policy works, you know, Whereas hiking the interest rates a lot, providing a huge amount of real interest rate to savers, should have done the trick. And for a while, it did. I mean, after the 2001 crisis, the dollarization rates in Turkey was around 60%. And in 2012, it was down to 25%.

So it seemed like it resolved the issue, right? It didn't. It created a huge and various structural issue. the Turkish economy is still dealing with today. One of the things it did was, you know, by the way, for about 10 years, Turkish economy offered 20 points of real interest rate. It is prohibitively expensive. That's why I said, you know, fixing the price of Tesla indefinitely would solve the issue

of put buyers. That's pretty much what happened. It was so expensive that it removed almost all volatility, so it did not make sense statically, not dynamically, to hold dollars. So it decreased dollarization. But it also created another issue. And for us to understand how this issue emerged, I'm going to have to talk about the incentive structure of the economy. So a policymaker would want the economy to grow, right? Because that's how you create jobs.

and if you create jobs, you get reelected. And for you to grow the economy, there are two things you can do, you know, on an accounting identity basis. You can either increase liabilities or you can increase equity. And you can, in the Turkish case, you can increase liabilities in Turkish lira or some other foreign currency. And if you want to do this, if you want to grow sustainably, you preferably, you preferably want to do this in Turkish lira because you are not able to print the foreign currency,

but let's say a bank issued a new loan denominated in Turkish lira. If this was a closed economy, completely closed, no exports, no imports, no capital flows, and there's a single bank, no reserve requirements or some sort. If there is one lira of loan issued, you have to have one lira of deposits, right? It's an identity. There is no way this money could escape. So there is no chance of a bank run apart from the maturity risk or something like that. So fraction reserve banking, this is not. You have complete matching of assets liability in currency. The problem is there might be some bleeds in this structure. So let's see you issued a loan. It might turn into dollar deposits by households. It might go to dividend and net dividend and interest rate payments abroad.

It might pay for your imports. You might get inflows from exports. This adds to. There is this issue of foreign capital inflows and outflows, and I include FDI in here as well. So if you notice what I described, the last four or five components of this equation is precisely the balance of payments equation. So that means if you issue a lira loan and you burn reserves, you will have fewer lira deposits than you have lira loans. And there are three components of this balance of payments equation. And in DM, there are only two that matters. You have foreign capital inflows and outflows and you have imports. In the Turkish case, there's a crucial third component that is dollarization. Right. I'm going to explain how these two are imponderance.

to balance at the same time. Some folks are calling this the fear of floating. I think, I mean, they're presenting it as a choice. I'm arguing that this is not a choice. This is simply a result of this structure. If you have this structure, you have no other choice, then, you know, go for fear of floating. So let's say you want to solve the issue of dollarization. And to do that, if you want to go the way of hiking interest rates like Turkey did in 2012, you have to increase it by a lot. I'm talking 20 points of real interest rates. When you do that, currency stabilizes.

So that's good. All right. Foreign capital probably flows in because you're paying a huge amount of money for them to do that. But your exports and imports are not going to match because you now made your exports hugely expensive for others and imports hugely cheap for your own consumers. So if you try to solve dollarization by acting rates, you'll have current account issues. If you try to solve current account issues, you know, by devaluing your currency, then you'll have dollarization issues and foreign capital, net phone capital issues, capital will flow out

because there's momentum and instability breeds instability. There will be dollarization. If you want to solve foreign capital inflow flow outflow issues with, let's say, you hide interest rates. Again, you will have the problem with current account. What I'm trying to say is, if you want to take the structure as given and act as a monetary policy maker, there is no way you can do policy, a growth policy based on lira. If you want to solve dollarization, you can't grow by issuing Lira loans.

Issuing Lira loans with this structure will great instability. So what did the Turkish policy makers do to grow, they took the structure as given an act in accordance with that. So they preferred foreign capital. If you can't issue Lira loans, you can get Lira, sorry, foreign currency loans from abroad and invest and consume with that. And that's precisely what happens. happened, and Turkey was able to grow on average 7% every year in the first five, six years

of that period after the 2001 crisis. The problem is this only works when the global USD cycle works in your favor. And it did work in Turkey's favor at the time. There was this clot of USD liquidity. And that kept ongoing until the tapered tantrum of 2012. And that was the reckoning because until that moment, everybody was praising the Turkish economy. You know, Montreal policy is independent, but they are still able to grow and they solve the issue of dollarization. And there is no inflation.

This is a successful economy, they were saying, and it did look that way. The problem is, once that global USD cycle reckoning came, this whole structure came crumbling down because now you can't get FX loans from abroad as well. You have a huge issue with foreign capital flows. And because of this structure, you are not able to grow by issuing legal loans in a sustainable manner. Right. So after that point, you started to see Mr. President getting more anxious, getting more restless about the monetary policy. That's why in the beginning said, I look at incentives. I do not. I try to analyze incentive because it is completely a result of the incentive structure. So can I just jump in here? And so just to recap, so Turkey has this dollarization problem. It's difficult for it to adjust interest rates in the way it

needs to without causing some sort of current account issue. And that wasn't a problem for a while, but then we had the taper tantrum and we had a retreat of dollar liquidity and suddenly this issue of dollarization really comes to the four. Could you maybe walk us through what exactly Erdogan announced this week when it comes to the new FX mechanism, this new program to try to halt the slide in the lira and how it anticipates trying to solve that problem of using the dollar as a tail risk hedge, as you described? I mean, the most popular press cover, this FX deposit instrument the most, but there were two other things in there as well. The main piece in that package was an instrument that completely replicates the payoff structure of that tail hedge.

So if you deposit your money into this new instrument and the US DILER exchange rates does not depreciate more than the prevailing central bank interest rate. You're going to receive the central bank interest rate. But if it, Lira depreciates more than that interest rates, you're going to be paid for that. So if Lira depreciates 18%, and the interest rate prevailing interest rate is 14%. Either the Treasury or the CBRT will cover your air quotes loss there. As I said, it is a free call option on USD, Lerner. exchange rate. If you are getting into this instrument from your USD deposit account, you're going to be dealing with CBRT and CBRT will be covering your loss. And if you have already a lira account and you put your Lira account money into this new instrument, you're going to be dealing with

the treasury and they will be covering the losses. And why did they do this? Probably because, you know, If it's already a USD deposit, dealing with the CBRT directly is easier. It becomes a CBRT reserve in that amount. And if you have a lira account, dealing with the treasury is easier because, you know, there is nothing for the central bank to do. And it is some sort of a risk sharing program because if, you know, half of the new money into this instrument comes from already USD accounts and the rest comes from, Turkish leader accounts, the Treasury will not be assuming that much risk, which was the main discussion point in the press, I guess.

Canadian women are looking for more. More to themselves, their businesses, their elected leaders, and the world are out of them. And that's why we're thrilled to introduce the Honest Talk podcast. I'm Jennifer Stewart. And I'm Catherine Clark. And in this podcast, we interview Canada's most inspiring women. Entrepreneurs, artists, athletes, politicians, and newsmakers, all at different stages of their journey. So if you're looking to connect, then we hope you'll join us. Listen to the Honest Talk

podcast on I Heart Radio or wherever you listen to your podcasts. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within

minutes, so you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. One of the things that people wonder is like, well, doesn't this just put pressure on the fiscal balance? Taking it off the central bank's balance sheet, putting it on the fiscal balance. We've seen Turkish credit default swaps rise in recent days, perhaps. Why does this actually fundamentally change anything rather than just?

as you put it, you know, shift risk away from the central bank onto the Treasury. Joe, if it works, it actually decreases, I think will decrease the CDS premiums because it transforms a balance of payments issue to a fiscal issue. And that fiscal issue is completely denominated in Turkish Lerres. It is something you can print. And it should decrease risk in your foreign currency law. I mean, this is the direct interpretation. If you use the framework, if you somehow solve the dollarization issue, if you're able to create this kitchen sink. So whenever you issue new

lira loans, you do not have to deal with the dollarization pressure. It will be the first time in, I said this in the beginning, but it will be the first time in Turkish history that the growth goal of the policymaker and the price stability goal of the central bank are not going to be in direct contradiction. So that is why I think it is hugely risk positive. So in other words, it sounds like basically what you're saying, if I could just sort of, essentially this creates a way for Turkish households to have a tail risk hedge that doesn't involve automatically buying dollars.

Yes. Yes. So can I just ask just on the fiscal question and whether or not this is going to impact Turkey's balance sheet, which has been, you know, one of the bright spots of the Turkish economy recently. So one of the perhaps unfair things about the way the world currently works is that foreign investors do have an enormous amount of power on emerging market economies in particular. And this is, you know, part of the problem of what's happened in Turkey is that we have bond vigilantes or inflation vigilantes who have gotten nervous about what's happening there and have, you know, put additional pressure on the currency. So I guess my question is, how is Turkey going to get foreign investors on side for a new currency stability mechanism that people are unfamiliar with and which on the surface looks like it's going to diminish the country's fiscal ability or fiscal strength? I think there are basically three scenarios. First, if the take-up rate of this new instrument is low,

that means the Treasury is not assuming that much risk. That will be negligible, I guess, if the take-up rate is high because of the current stock of foreign investment is Turkey, which is, extremely low, especially in bonds. It is almost non-existent. And they, I mean, foreigners almost completely left swaps as well. There is some amount of investment in equities, but that is for some reason rather stable. I mean, that lived through any type of crisis we had in the last four or five years, including the 2018 crisis. So if you assume that equity stock is going to be stable going forward. I don't think foreign investors matter that much. So that leaves dollarization in current accounts as the determinants of reserves and the exchange rates. So if the

take-up rate is high and currently the Turkish economy is having current account surpluses. And our internal analyses show that for their first time in September, as far as I remember, Turkey had a seasonally adjusted current account surplus. This is especially positive because Turkey is a huge commodity importer, and despite the global commodity prices skyrocketing, Turkey is able to have current account surpluses. So that's good. That leaves dollarization, and if the take-up rate is high here,

that means the dollarization issue is getting resolved. In that case, you will now. have an effects pressure. So the treasury will not have much to deal with there either. So the last case is some exogenous shock. That is unpredictable. Can it happen? It can.

But I don't think this mechanism increasing the pressure on the treasury and increasing the risk there is a fair assessment based on the base cases. You know, the world is an interesting place. some incredible thing might happen, but it's not my best case. Let's phrase it like that. Can you just explain real quickly? You mentioned Turkey as a commodity importer. Commodities are very high.

How is Turkey currently running a current account surplus? Services are in huge surplus, mainly tourism. Okay. And, you know, one good thing about Turkish tourism is it is it's elasticity to the real effective exchange, it is pretty high. So when you depreciate your currency, you get more bank for your buck than what you have in the good side. So that is a huge positive. And if COVID is, you know, if COVID is not going to be a huge issue in the near future, which I think it will not be. But, you know, that's up to debate. Turkey will keep giving current account surpluses.

One risk is, yeah, imports are way higher because of the commodity prices, but exports are higher as well because the global economy was staging an impressive recovery. If somehow the global central bank moves decreased that, you know, incur that recovery more than they decrease commodity prices. Turkey might have some issues, but again, that's not my base case either. I think commodity prices are much more susceptible to the U.S.D. cycle than global growth. So I'm overall optimistic about the future current account situation in Turkey. I guess my next question is when would we expect to see or would we expect to see published take-up figures for the new FX plan?

And then secondly, what are you watching in order to see whether or not it's working? And I realize, you know, watching the lira would be the obvious thing to do. But are you looking at the take-up figures or, I don't know, maybe pressure on Turkey's foreign reserves or something like that to see whether or not this is actually pressuring Turkey's fiscal position? Well, there is one main thing I'm looking at. I mean, the equation I talked about is more or less an identity. So I look at the difference between new Lira loan assurance minus the new deposits in Lira. So if that is not a huge number, that means things are going well. We are not burning that much, you know, that many reserves.

if that number is giving negative signals, that means dollarization issue. Dollarization pressure is still there despite the current account surplus. So that might be alarming. And I'm going to keep watching that number going forward. You know, it's interesting because earlier Tracy asked about what it would take to sort of get foreign capital on side. But to my, you know, like the question that I'm sort of wondering about is the sort of like, I guess the domestic take-up, I mean, basically what Tracy just asked, this domestic take-up, how much understanding does there have to be and how much convincing from the sort of the government,

from banks to retail depositors to the public, to the depositors about how these new mechanisms will work and how do the banks and government establish credibility that this, you know, this free put or this free dollar or lear call option that they're being offered is actually going to be given to them? How is there a credibility risk on that side? After such a hugely volatile period, there is a risk of a credibility deficit. The fiscal position of Turkey is, you know, I mean, as Tracy put it, one of his biggest strengths. So that argument and the basic structure of the new instrument should suffice. It is almost a no-brainer. Excuse my language, but you're being offered Lira interest rates on FX deposits, basically. FX deposits currently pay like 1-2% and Lira pays around

15-16%. And you are hedged against any upside in USD Lira exchange rate. So it is a complete no-brainer. I think people will want to see, you know, their friends and family who got into this instrument getting paid first. And after that, I think the take-up rate will increase, by the way, the Treasury Ministry today announced that there was, you know, about 10 billion liras up until now that got in to this new instrument. I don't know if they're going to regularly publish the figures about this, but, you know, we have this data at this moment. You know, one question I have, it seems to me, and I don't know if this is, if I'm thinking about this, exactly right, but it seems to me that it's one of these things where if it works, in theory, it wouldn't even be necessary. So you offer these special FX hedged accounts, basically some people have described them as, like tips meet CDs and obviously, as you put it, a free dollar or a call option. But it seems to me that in theory, if it works, you don't actually need people to transfer the

money into these accounts because the existence of these accounts has essentially stemmed the sell-off. Is that a sort of like fair characterization or is that something that victory would look like? That is a completely fair characterization. And it is basically basically basically how it went in other countries that applied similar schemes like Brazil and Israel. There's a lot of talk about, you know, what Turkey is doing was tried before and it failed, things like that, you know. I'd like to address that because there's a crucial difference. That's why I think they diagnosed the problem right, because this is strictly limited to real people.

This excludes corporates, this exclude foreigners. because there were some schemes in Argentina. There was one in Turkey's past in like 70s or something that targeted folks living abroad. And that is a surefire way of creating a balance of payments issue. Because if target group has a balance sheet denominated in a foreign currency, anytime they want to take their money out, you're going to have issues with your reserves. but because this is just, you know, exclusively for local folks who consume goods in Turkish lira, and, you know, they care about Turkish lira, they do not care about,

they do not have a foreign currency denominated balance sheet. That is why I think they got it right, and that is why I think this has a chance of working. Because wherever it did work, like in Brazil and Israel, this is why it worked. They did not target foreigners. They targeted the locals. They tried to solve dollarization. They did not want to attract foreign inflows. Because if you want to attract foreign inflows,

sustainably, this is a bad way of doing that. If you want to solve dollarization, this works. Lutflah, thank you so much. I genuinely learned a lot from that conversation. Thank you for having me. I'm glad. Yeah, that was great. Thanks, Lutela.

That was really interesting. I felt that extremely helpful. It's pretty complicated, obviously. And, you know, when I sometimes in all these conversations, my head can hurt thinking about, you know, the capital account, the current account and all this. But this idea of understanding this new scheme is like, you know, a tail risk hedge. Very interesting and very definitely helps me understand the situation better. Yeah. Also, your question about sort of the less people use it, the more it might work. That kind of reminded me of the Fed's corporate bond buying program from last year, where it actually didn't end up buying that many corporate bonds because it didn't need to. Just the promise of coming in and stabilizing the market had the effect

of stabilizing the market. But that said, it's clearly a big bet on people actually believing in this mechanism, right? And if it goes the other way, if there's a massive take-up and, you know, the Turkish government ends up having to monetize its funding for that, then you could see it being a problem. This is exactly right. And I think, you know, if you think about, first of all, you mentioned the corporate bond buying program, also the municipal bond buying program. I would also put the OMT in the euro area crisis.

Very similar thing, this idea of like, if you make a credible enough promise, you actually You never have to spend any money as sort of like one of these core ideas in sort of like central banking. And it's like this too. It's like, okay, we credibly promise to compensate you if the lira plunges. So hold your money in lira. And if the promise is credible and everyone holds their money in lira, then you don't have the problem of the lira plunging and you solve the dollarization problem, which could be huge.

So that's like a really interesting way. That was really helpful to think about it. But as you said just now, like it is a really big bet because the fear. it seems to me would be you have a significant portion of the population take it up, essentially like take up this insurance, but then you also have a significant portion of the population who like if they continue to dollarize and the lira were to continue to plunge, and then the government is on the hook for this big put option that it's given everyone or a call option, however, depending on which side of the pair trade you're talking about,

then you could see it being like a very costly bet from the fiscal perspective. Totally. And I know you and I have both spoken about this already, but it is a little bit reminiscent of certain cryptocurrencies that tell everyone to, you know, huddle or if everyone just holds on and never sells, everyone is going to benefit. There is a threat of that in there. There's game. It's exactly right. Because like the sort of like the game theory of crypto is like we all go to the one side of the payoff matrix. We all win. It does feel like there's. is like an element of game theory, and it really is going to seem, does the government have the credibility to get everyone into this one corner of the matrix or enough people that it stems the decline? But look, like, it was a huge rally in the lira when they announced that. And so there is obviously, as Lufila pointed out, some sort of like, well, this potentially could be a game changer. Yeah. It's working so far, but obviously we'll have to keep an eye on it.

Yeah. All right. Shall we leave it there? Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Alloway.

And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwart. Follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Followed the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg, under the handle, at podcasts. Thanks for listening. I'm Francine Lacquois, an award-winning journalist, and I've got a new podcast, Leaders with Francine Lacqua from Bloomberg podcasts.

I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacois wherever you get your podcast. podcasts.