Erdogan’s Plan to Manage Türkiye's Economic Crisis Gets Summer Reprieve

A man walks past a currency exchange office in Istanbul, Türkiye, June 10, 2022. REUTERS/Dilara Senkaya/File Photo
A man walks past a currency exchange office in Istanbul, Türkiye, June 10, 2022. REUTERS/Dilara Senkaya/File Photo
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Erdogan’s Plan to Manage Türkiye's Economic Crisis Gets Summer Reprieve

A man walks past a currency exchange office in Istanbul, Türkiye, June 10, 2022. REUTERS/Dilara Senkaya/File Photo
A man walks past a currency exchange office in Istanbul, Türkiye, June 10, 2022. REUTERS/Dilara Senkaya/File Photo

A windfall of foreign funds arriving in Türkiye and sustained interest in a state-backed deposit scheme have brought some relief for President Tayyip Erdogan's economic plan less than a year before tight elections.

Erdogan's program stressing monetary stimulus, exports and economic growth sent inflation soaring when the central bank slashed interest rates by 500 basis points late last year, setting off a historic currency crash in December.

Even as annual inflation reached 80% last month, straining households and sapping earnings, the government has stuck to its unorthodox plan which it expects will eventually help flip the country's chronic current account deficits to surpluses. Strong exports and tourism have helped to finance a current account deficit which narrowed in June, despite heavy energy costs, according to the latest data.

Relief began in July when foreign visitors jumped by more than 50%, exceeding pre-pandemic levels thanks partly to Russians with nowhere else to go given sanctions over the war, Reuters reported.

The central bank's foreign reserves - badly depleted from nine months of supporting the lira - have nearly tripled since early July to $15.7 billion on a net basis. Bankers say inflows of some $5 billion from Russia provided a boost, though authorities have not commented and do not publish such data.

Adding to relief for Erdogan, a lira-protection scheme unveiled during the December crisis cleared a big hurdle in July and August when $30 billion in deposits were rolled over without issue, according to data calculated by bankers.

Only a further $3 billion in deposits need to be rolled over next month, and little more until next year, locking many companies in for another six months to the scheme known as KKM.

The scheme seeks to curb demand for foreign currency by compensating depositors for lira losses against foreign currencies.

Given the lira has shed 27% to the dollar this year, KKM costs are rising for the Treasury and the central bank, which pay depositors the difference.

But most companies and individuals have stuck with KKM, avoiding another rush to foreign currencies and a potential repeat lira crash with less than a year before Erdogan faces tight elections.

"The cost is high but if this amount was being kept in forex then we would face bigger problems," a source with knowledge of the matter said.

"If there was any other alternative it would have been used but it looks like this will continue, at least until the beginning of next year," the source said of the scheme, requesting anonymity given sensitivities of the government plan.

Depositors are lured to KKM by cheaper credit and tax incentives, bankers, companies and officials told Reuters. In total, protected deposits are worth 1.2 trillion lira ($66.23 billion), data shows.

The central bank does not disclose its KKM-related costs.

But since it was introduced on Dec. 20 - the day the lira hit an all-time low of 18.4 to the dollar - KKM has cost the Treasury 60 billion lira, 20 billion lira more than this year's budget allocation for the scheme.

The scheme, along with big forex interventions by the central bank, helped rescue the lira at the time.

But the currency has since tumbled back to near its record low, hitting 18.15 to the dollar after the central bank shocked markets last week by cutting its benchmark interest rate by another 100 basis points.



ECB's Lagarde Renews Integration Call as Trade War Looms

FILE PHOTO: European Central Bank President Christine Lagarde and Governor of the Bank of Finland Olli Rehn arrive at the non-monetary policy meeting of the ECB's Governing Council in Inari, Finnish Lapland, Finland February 22, 2023. Lehtikuva/Tarmo Lehtosalo via REUTERS//File Photo
FILE PHOTO: European Central Bank President Christine Lagarde and Governor of the Bank of Finland Olli Rehn arrive at the non-monetary policy meeting of the ECB's Governing Council in Inari, Finnish Lapland, Finland February 22, 2023. Lehtikuva/Tarmo Lehtosalo via REUTERS//File Photo
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ECB's Lagarde Renews Integration Call as Trade War Looms

FILE PHOTO: European Central Bank President Christine Lagarde and Governor of the Bank of Finland Olli Rehn arrive at the non-monetary policy meeting of the ECB's Governing Council in Inari, Finnish Lapland, Finland February 22, 2023. Lehtikuva/Tarmo Lehtosalo via REUTERS//File Photo
FILE PHOTO: European Central Bank President Christine Lagarde and Governor of the Bank of Finland Olli Rehn arrive at the non-monetary policy meeting of the ECB's Governing Council in Inari, Finnish Lapland, Finland February 22, 2023. Lehtikuva/Tarmo Lehtosalo via REUTERS//File Photo

European Central Bank President Christine Lagarde renewed her call for economic integration across Europe on Friday, arguing that intensifying global trade tensions and a growing technology gap with the United States create fresh urgency for action.
US President-elect Donald Trump has promised to impose tariffs on most if not all imports and said Europe would pay a heavy price for having run a large trade surplus with the US for decades.
"The geopolitical environment has also become less favorable, with growing threats to free trade from all corners of the world," Lagarde said in a speech, without directly referring to Trump.
"The urgency to integrate our capital markets has risen."
While Europe has made some progress, EU members tend to water down most proposals to protect vested national interests to the detriment of the bloc as a whole, Reuters quoted Lagarde as saying.
But this is taking hundreds of billions if not trillions of euros out of the economy as households are holding 11.5 trillion euros in cash and deposits, and much of this is not making its way to the firms that need the funding.
"If EU households were to align their deposit-to-financial assets ratio with that of US households, a stock of up to 8 trillion euros could be redirected into long-term, market-based investments – or a flow of around 350 billion euros annually," Lagarde said.
When the cash actually enters the capital market, it often stays within national borders or leaves for the US in hope of better returns, Lagarde added.
Europe therefore needs to reduce the cost of investing in capital markets and must make the regulatory regime easier for cash to flow to places where it is needed the most.
A solution might be to create an EU-wide regulatory regime on top of the 27 national rules and certain issuers could then opt into this framework.
"To bypass the cumbersome process of regulatory harmonization, we could envisage a 28th regime for issuers of securities," Lagarde said. "They would benefit from a unified corporate and securities law, facilitating cross-border placement, holding and settlement."
Still, that would not solve the problem that few innovative companies set up shop in Europe, partly due to the lack of funding. So Europe must make it easier for investment to flow into venture capital and for banks to fund startups, she said.