Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Halloway. It's pretty incredible,
Speaker 1: how like every you know, for the last several years,
Speaker 1: maybe five, six, seven years, I feel like there's this
Speaker 1: rhythm where, maybe like every nine months or every year,
Speaker 1: the world really turns its focus to what's going on
Speaker 1: with Turkey, what's going on with Turkish monetary policy, and
Speaker 1: what's going on with the Lira. Yeah, I know what
Speaker 1: you mean. It does seem to pop up like at
Speaker 1: least once a year and suddenly everyone's very focused on it,
Speaker 1: and then within a month or two people seem to
Speaker 1: have forgotten it, or at least it's moved out of
Speaker 1: the limelight. But I have to say we're recording this
Speaker 1: on Christmas Eve, December, and this week in particular or
Speaker 1: has been one of those weeks where everyone wakes up
Speaker 1: and decides that they all have opinions on Turkey and
Speaker 1: what's going on there. And to be fair, we have
Speaker 1: seen this enormous amount of volatility in the lira. So
Speaker 1: I think the lira was up something like twenty five
Speaker 1: per cent on a single day this week after are
Speaker 1: to Wan announced a new mechanism to try to stop
Speaker 1: its halt, and before that it was down. I think
Speaker 1: it had lost like half its value over the past
Speaker 1: three months. So just crazy moves in the currency. Yeah, right.
Speaker 1: There are a lot of e m s which see
Speaker 1: significant currency volatility. You know, we see it in Brazil
Speaker 1: from time to time, we see it in South Africa
Speaker 1: and so forth, but there seems to be nothing quite
Speaker 1: like the volatility that we see in the Lira, and
Speaker 1: it's incredibly volatile. And as you mentioned, and you said
Speaker 1: there a day I think it was up like thirty
Speaker 1: five from the lows of that day, because I think
Speaker 1: in the morning it was down ten percent. But as
Speaker 1: you mentioned, President Radwan having instituted a new mechanism to
Speaker 1: attempt to stem the decline, and we'll get into how
Speaker 1: that works. I think it was up thirty like truly,
Speaker 1: any sort of like macro tourist and what is interest
Speaker 1: in currencies, monetary policy, etcetera, had to be sort of
Speaker 1: like jaw dropping at that move that day, right. And
Speaker 1: the other thing going on with Turkey, of course, is this,
Speaker 1: I guess, rejection of economic orthodoxy. So when it comes
Speaker 1: to emerging markets, I think there's often a perception that,
Speaker 1: you know, e M s are different to developed economies
Speaker 1: for a variety of reasons. But there's always concern about
Speaker 1: fiscal discipline and whether or not they're going to be conservative,
Speaker 1: whether or not they have the institutional strength to you know,
Speaker 1: keep the economy in check and keep it stable. And
Speaker 1: then when it comes to Turkey, we've seen just I guess,
Speaker 1: an extreme version of these concerns, where are Doowan is
Speaker 1: rejecting economic orthodoxy. He keeps lowering interest rates and that's
Speaker 1: leading to inflation and that's causing the currency to fall,
Speaker 1: and no one really knows how to interpret it. I guess, yeah,
Speaker 1: I think that's exactly right. And you see it from
Speaker 1: time to time that various e M s will say,
Speaker 1: have a central banker who is very steeped in a
Speaker 1: sort of neoclassical economics, and whether the sort of measures
Speaker 1: are successful or not, there's always this sort of there's
Speaker 1: often this sort of portrayal to foreign investors of like
Speaker 1: fiscal discipline in central bank independence and macroeconomic orthodoxy. And
Speaker 1: I think, uh, you know, people look at Turkey and
Speaker 1: they see an example of a country and a system
Speaker 1: that very much not playing by those sort of like
Speaker 1: the standard playbook, and then they see the volatility and
Speaker 1: they say, oh, well, this is what happens when you
Speaker 1: don't when you don't follow the rules laid out by
Speaker 1: the University of Chicago Economics department. Yeah, that's one way
Speaker 1: of putting it. Yeah, anyway, but I still, you know,
Speaker 1: I again I sort of edgine, like, you know, we're
Speaker 1: all so many like tourists look at Turkey, and I
Speaker 1: don't think we have like a truly deep understanding of
Speaker 1: what is going on in the economy, approach to monetary policy,
Speaker 1: what is going on with the leer and so forth.
Speaker 1: So I'm very excited about our guest today who is
Speaker 1: going to help us understand everything about how the Turkish
Speaker 1: economy and monetary system works. We're gonna be speaking with
Speaker 1: Lutfla Bingo. He's an economist at a bank in Istanbul
Speaker 1: al Baraka Turk Lutfala. Thank you so much for joining us,
Speaker 1: Thanks for having So why don't we start? I mean,
Speaker 1: would you say it's I mean, it's a fair characterization,
Speaker 1: this idea that in this very Turkey, in a very
Speaker 1: sort of overt sense does not sort of make the
Speaker 1: same I guess that. Yeah, I want to play by
Speaker 1: the same playbook as many emerging markets typically attempted. There
Speaker 1: are some similarities with some periods with some countries, but
Speaker 1: Turkey has some very unique fundamental conditions. Some of these
Speaker 1: are issues, and some of these are strengths, and the
Speaker 1: Turkey Turkish economy is of course bound by these. That
Speaker 1: is why sometimes Turkey makes different choices than the rule book.
Speaker 1: I'm not even sure a proper rule book exists for
Speaker 1: emerging markets, but that will be one of my arguments today.
Speaker 1: There is no rule book for what Turkey goes through
Speaker 1: it and there will be one if this instrument works.
Speaker 1: You're talking about the attempt to stabilize the lerou that
Speaker 1: was announced this week. But before we get to that,
Speaker 1: can I just ask a really basic and I guess
Speaker 1: this is the obvious question, but you know what is
Speaker 1: where all the interest rate cuts? Like, where does the
Speaker 1: refusal to actually raise interest rates come from? And what's
Speaker 1: the rationale for going in that direction? To answer that question,
Speaker 1: I'm going to have to provide an entire framework, which
Speaker 1: I was planning to do anyway. Ship So who should
Speaker 1: I go and do that? Ye? Sure, please go for it? First, off.
Speaker 1: It's going to sound like a cliche, but I do
Speaker 1: not believe in structures or you know, claims. I believe
Speaker 1: in incentives, and for various reasons I'm going to talk
Speaker 1: about today the central bankers goal of price stability and
Speaker 1: the policymakers goal of you know, having growth providing jobs.
Speaker 1: Those are two conflicting goals in the case of Turkey,
Speaker 1: and that is for precisely one reason, because there is
Speaker 1: a huge amount of dulverization. And that is precisely why
Speaker 1: I do not see this week's move as just the
Speaker 1: short term measure to you know, stabilize the er. I
Speaker 1: see it as a crucial structural reform. I begin this
Speaker 1: week extremely pessimistically. I had almost no hope, but now
Speaker 1: I'm rather hopeful because what they announced it tells me
Speaker 1: that they diagnose the problem right, and if the mechanisms
Speaker 1: announced work, we won't have that problem anymore. So for
Speaker 1: the first time in probably Turkish history, after the end
Speaker 1: of you know, Breton Woods, perhaps we will have a
Speaker 1: proper alignments of incentives. So I think I will have
Speaker 1: answered the question why the policy makers you know, add
Speaker 1: fuel to the fire whenever there is a global USD
Speaker 1: cycle downturn. Whenever fed heights interest rate, you see central
Speaker 1: bank independence and Turkey disappear. I will try to explain
Speaker 1: why is that? So, what do we get it? Just
Speaker 1: get give us this sort of basic argument for because
Speaker 1: I think from a sort of like foreign perspective, the
Speaker 1: typical story is air do Wan is pushing this sort
Speaker 1: of like very heterodox, unusual policy. It's not out of
Speaker 1: the central anchor playbook. It's bad. We get to the lira,
Speaker 1: people flee to dollars and so forth, and it leads
Speaker 1: to inflation and price instability. It sounds like your argument
Speaker 1: is that it's something much deeper and much more structural
Speaker 1: with the Turkish economy, and that it can simply be
Speaker 1: attributed to these sort of idiosyncratic policy choices. So before
Speaker 1: we even get into the mechanism, and we'll talk about that,
Speaker 1: of course, what is it about the structure of the
Speaker 1: Turkish economy in your view, that creates these cycles? There
Speaker 1: are three types of flows that are inconsistent with each other.
Speaker 1: So you have dollarization, you have the current account balance,
Speaker 1: and you have the foreign capital inflows and outflows. There
Speaker 1: is no single interest rate that can balance all three
Speaker 1: of these in the case of Turkey, so whatever you do,
Speaker 1: you'll sacrifice something. And in the case of Turkey, if
Speaker 1: given this structure, if you don't change anything, you take
Speaker 1: this is given if you aim for price stability, and
Speaker 1: the global central banks, especially FED, is hiking interest rates.
Speaker 1: So you do not have that much capful flows, you
Speaker 1: do not receive that much capital flows, there is no
Speaker 1: way you can grow. Basically that that will be my argument.
Speaker 1: And any policymaker anywhere in living in a democracy wants
Speaker 1: the economy to grow and if something is standing in
Speaker 1: the way of that, that that thing will be run over.
Speaker 1: That that that is what's happening in Turkey, and if
Speaker 1: dollarization issued, it's result I think you'll see are gone
Speaker 1: talking about interest rates a lot less. Can you, just
Speaker 1: before we move on, can you talk about how dollarization
Speaker 1: became such a thing for the Turkish economy, because of course,
Speaker 1: there are a lot of emerging markets that have dollarization
Speaker 1: to some degree. They have people who you know, don't
Speaker 1: necessarily trust the local currency and want to shift into
Speaker 1: something that they perceive as more safe, or they have
Speaker 1: a lot of you know, trade that's denominated in dollars,
Speaker 1: things like that. But in Turkey, as you just laid out,
Speaker 1: it seems to be extreme or it seems to be
Speaker 1: more of an issue because of the structure of the economy.
Speaker 1: So how did that happen. It started with a very
Speaker 1: premature capital account of done by the late President Turkados
Speaker 1: All In with that kepital account opening, he also let
Speaker 1: people have FX deposit accomps in local banks, So that's
Speaker 1: how it started. And throughout the nineties there was this
Speaker 1: predictable pattern whenever, whenever there was something wrong with the
Speaker 1: Turkish economy you know USD Lira exchange, it blew up.
Speaker 1: So if you are a you know, household, if you're
Speaker 1: a person observing this pattern, this means you have now
Speaker 1: access to a put option. That's pretty much it's in
Speaker 1: the case of Turkey, I argue the main reason for
Speaker 1: dolorization is that that's the only tail events hedge household
Speaker 1: has access to. And that's what makes this problem hugely pernicious,
Speaker 1: because if you treat it like some sort of simple
Speaker 1: portfolio choice and tried to solve it that way, it
Speaker 1: doesn't work. And I'll tell how they treated that way
Speaker 1: and it didn't work. And now for the first time,
Speaker 1: diagnosing the problem right that you know, dollarization, households holding
Speaker 1: dollars is a tail event hedge, and unless you completely
Speaker 1: replicate the payoff structure of that tail event hedge, there
Speaker 1: is no way you can prevent dollarization, you know, borring
Speaker 1: capital controls or something. So this is the first credible
Speaker 1: attempt to do that. I think that That's what I
Speaker 1: meant by they seem to be diagnosing the problem, right.
Speaker 1: What do I mean by you can't solve this problem
Speaker 1: by treating it as a simple portfolio choice issue. If
Speaker 1: this is another risky asset, what do you do? You
Speaker 1: hike interest rates, right, you make the alternative more preferable.
Speaker 1: You should be able to solve your problem. Right, But
Speaker 1: that does not work in in the case of Turkey.
Speaker 1: Whenever you hike interest rates, if other uncertainties are still their,
Speaker 1: households do not just go ahead and buy lira. They
Speaker 1: hold onto their dollars, and they buy even more if
Speaker 1: the uncertainty is extreme. And another issue is if there
Speaker 1: is saying momentum in the US the Lira exchange eight,
Speaker 1: you see households buying more. That is typical for the
Speaker 1: case of a put option. But if it was a
Speaker 1: simple sort of portfolio choice. There is a chance you
Speaker 1: might observe that, but it should not be this predictable.
Speaker 1: So I think one major difference is let me give
Speaker 1: you an example. Let's say Tesla wants to know dissuade
Speaker 1: put option buyers and it's stock from buying put options,
Speaker 1: and to do that, fits increased it's dividends. Would it work?
Speaker 1: I think not, because the put option is a tail
Speaker 1: event hedge and increasing dividends does nothing to that. I mean,
Speaker 1: it would weaken Tesla's balantie it would it would, yes,
Speaker 1: I mean that was one of the things that happened
Speaker 1: in Turkey as well. They would do nothing to Tesla
Speaker 1: put buyers. So if you want folks from you, if
Speaker 1: you want to prevent folks on buying Tesla puts, you
Speaker 1: have to somehow replicate that payoff structure or remove on
Speaker 1: certainty completely. But removing on certainty completely means you can't
Speaker 1: grow either, and I'm not sure if that's something you want.
Speaker 1: I mean, providing a stock that is completely you know,
Speaker 1: treading with a fixed price would solve that issue, But
Speaker 1: would you want that? I think not. So I think
Speaker 1: that's that That's a good example of what we're dealing
Speaker 1: with here we where we go on. I just wanna
Speaker 1: clarify this because I think this is important to understanding
Speaker 1: your argument. So in a typical sort of like portfolio channel,
Speaker 1: you're like raise the interest rate and that creates some
Speaker 1: sort of like marginal incentive to hold lira. But if
Speaker 1: people are holding dollars as a tail risk hedge, then
Speaker 1: it really doesn't solve the problem. Can you just explain
Speaker 1: a little bit further this idea, the tail risk hedge
Speaker 1: against what And you sort of mentioned the premature opening
Speaker 1: of the capital account in the late eighties, But what
Speaker 1: is the impulse to hold such a strong um tail
Speaker 1: risk hedge and how is this not previously appreciated by policy?
Speaker 1: This is the dynamic of that previously appreciated by policymakers.
Speaker 1: Let me describe what happened when they tried to hide
Speaker 1: rates to solve this issue. And for a while it
Speaker 1: looked like they solved this issue. After the two thousand
Speaker 1: and one crisis in Turkey, there was this im stirchial
Speaker 1: program and you know the primary objective of that program,
Speaker 1: it was to decrease inflation, you know, control inflation, and
Speaker 1: to do that you have to provide some sort of
Speaker 1: currency stability, and one of the major roadblocks in front
Speaker 1: of that was dollarization. And it did something else as well.
Speaker 1: It dollarization weakens the monetary transmission mechanisms. So you're they
Speaker 1: hired the dollarization your montree policy works, you know, whereas
Speaker 1: hiking the interest rates a lot, providing a huge amount
Speaker 1: of real interest rate to savers should have done the trick,
Speaker 1: and for a while it did. I mean, after the
Speaker 1: two thousand and one crisis, at the dollarization rates in
Speaker 1: Turkey was around sixty percents and in two thousand and
Speaker 1: twelve it was down to so it seemed like it
Speaker 1: resolved issue, right. It didn't. It created a huge and
Speaker 1: various structural issues the Turkish economy is still dealing with today.
Speaker 1: One of the things that it did it was, you know,
Speaker 1: by the way, for about ten years, Turkish economy offered
Speaker 1: twenty points of real interest ring. It is prohibitively expensive.
Speaker 1: That that's why I said, you know, fixing the price
Speaker 1: of Tesla indefinitely would solve the issue of put buyers.
Speaker 1: That that's pretty much what happened. It was so expensive
Speaker 1: that it removed almost all volatility, so it did not
Speaker 1: make sense statically, not dynamically to whole dollars, so it
Speaker 1: decreased tolarization, but it also created another issue. And for
Speaker 1: us to understand what, you know, how this issue emerged,
Speaker 1: I'm going to have to talk about the incentive structure
Speaker 1: of the economy. So the policymaker would want the economy
Speaker 1: to grow, right, because that's how you create jobs, and
Speaker 1: if you create jobs, you get reelected. And for you
Speaker 1: to grow the economy, there two things you can do,
Speaker 1: you know, on an accounting identity based basis, you can
Speaker 1: either increase liabilities or you can increase equity. And you can,
Speaker 1: in the Turkish case, you can increase liabilities in Turkish
Speaker 1: lira or some other foreign currency. And if you want
Speaker 1: to do this, if you want to grow sustainably, you preferably,
Speaker 1: you know, want to do this in Turkish later because
Speaker 1: you are not able to print the foreign currency. But
Speaker 1: let's say a bank issued a new loan denominating in
Speaker 1: Turkish lira. If this was a closed economy, completely closed,
Speaker 1: no exports, no importonal capital flows, there's and there's a
Speaker 1: single bank, no no reserve requirements or some sort. If
Speaker 1: there is one lira of loan issued, you have to
Speaker 1: have one lira of deposits. Right, it's it's it's an identity.
Speaker 1: There's no way there's money could escape, so there is
Speaker 1: no chance of a bank run apart from the you know,
Speaker 1: uh sure to risk here something like that. So fractional
Speaker 1: reserve banking this is not you have complete matching events
Speaker 1: is liability in currency. The problem is there might be
Speaker 1: some bleeds in the structure. So let's see you issue
Speaker 1: it a loan. It might turn into dollar deposits by households.
Speaker 1: It might go to dividend and net dividend and interest
Speaker 1: rate payments abroad. It might pay for your imports. You
Speaker 1: might get influence from exports. This adds too, there's this
Speaker 1: issue for capabling flows and out flows. And I include
Speaker 1: f d iron here as well. So if you notice
Speaker 1: what I described, the last four or five components of
Speaker 1: this equation is precisely the balance of payments equation. So
Speaker 1: that means if you issue a little loan and you
Speaker 1: burn reserves, you will have fewer lit deposits than you
Speaker 1: have little loans. And there are three bonus of this
Speaker 1: bouncier payments equation, and in d M there are only two.
Speaker 1: That matters. You have foreign capital inflows and outflows, and
Speaker 1: you have imports and exports. In the Turkish case, there's
Speaker 1: a crucial third component that is dollarization. I'm going to
Speaker 1: explain how these two are impossible to balance. At the
Speaker 1: same time. Some folks are calling this the fear of floating.
Speaker 1: I think, I mean they're presenting it as a choice.
Speaker 1: I'm arguing that this is not a choice. This is
Speaker 1: simply a result of this structure. If you have this structure,
Speaker 1: you have no other choice, then you know, go for
Speaker 1: fear of fear of floating. So let's say you want
Speaker 1: to solve the issue of dollarization, and to do that,
Speaker 1: if you want to go the way of fiking interest
Speaker 1: rates like Turkey did in two thousand and twelve, you
Speaker 1: have to increase it by a lot, untoven twenty points
Speaker 1: of real interest rates. When you do that, currency stabilizes,
Speaker 1: so that that's that's good, all right. Foreign capital probably
Speaker 1: flows in because you're paying a huge amount of money
Speaker 1: for them to do that, but your exports and imports
Speaker 1: are not going to match because you now made your
Speaker 1: exports hugely expensive for others and imports hugely cheap for
Speaker 1: your own consumers. So if you try to solve with
Speaker 1: dollarization by congrades, you'll have earrant account issues. If you
Speaker 1: try to solve euarant account issues, you know, by devaluing
Speaker 1: your currency, then you'll have dollarization issues and form capital
Speaker 1: netflorm capital issues. Capital will flow out because there's momentum,
Speaker 1: and instability breeds instability. There will be dollarization. If you
Speaker 1: want to solve form capital and flow out flow issues
Speaker 1: with let's say you hide interest rates again, you will
Speaker 1: have the problem with Guarentt account. What I'm trying to
Speaker 1: say is if you want to take the structure given
Speaker 1: and acts as among Montrey policy maker, there is no
Speaker 1: way you can do policy growth policy based on lyra.
Speaker 1: If you want to solve dollarization, you can't grow by
Speaker 1: issuing lira loans. Issuing lieral LANs with the structured will
Speaker 1: breed instability. So what did the Turkish policy makers do
Speaker 1: to grow? They took the structure as given an act
Speaker 1: in accordance with that, so they preferred foreign capital. If
Speaker 1: you can't issue lira loans, you can get lira sorry,
Speaker 1: foreign currency loans from abroad and invests in consume with that.
Speaker 1: And that's precisely what happened, and Turkey was able to
Speaker 1: grow on average seven percent every year in the first
Speaker 1: five six years of that period after the two thousand
Speaker 1: and one prices. The problem is, this only works when
Speaker 1: the global USD cycle works in your favor, and it
Speaker 1: did work in Turkey's favor at the time. There was
Speaker 1: this lot of us D liquidity and that kept on
Speaker 1: going until the taper tension of two thousand and twelve.
Speaker 1: And that was the reckoning because until that moment, everybody
Speaker 1: was praising the Turkish economy. You know, Montree policy is independent,
Speaker 1: but they are still able to grow and they solve
Speaker 1: the issue of dollarization and there is no inflation. This
Speaker 1: is a successful economy, they were saying, and it did
Speaker 1: look that way. The problem is, once that global USD
Speaker 1: cycle reckoning came, this old structure king trumbling down because
Speaker 1: now you can't get effects loans from abroad as well,
Speaker 1: you have a huge issue with form capital flows and
Speaker 1: because of this structure, you are not able to grow
Speaker 1: by issuing literal loans in a sustainable manner or either.
Speaker 1: So after that point you started to see Mr President
Speaker 1: getting more anxious, getting more restless about the Montree policy.
Speaker 1: That's why I in the beginning said I you know
Speaker 1: look at incentives. I do not I tried to analyze
Speaker 1: incentive because it is completely a result of the incented structure.
Speaker 1: So can I just jump in here? And so just
Speaker 1: to recap, so Turkey has the stollarization problem. It's difficult
Speaker 1: for it to adjust interest rates in the way it
Speaker 1: needs to without causing some sort of current account issue.
Speaker 1: And that wasn't a problem for a while, but then
Speaker 1: we had the Taper tantrum and we had a retreat
Speaker 1: of dollar liquidity, and suddenly this issue of dollarization really
Speaker 1: comes to the four Could you maybe walk us through
Speaker 1: what exactly are Dowan announced this week when it comes
Speaker 1: to the new um effex mechanism, this new program to
Speaker 1: try to halt the slide in the lira, and how
Speaker 1: it anticipates trying to solve that problem of using the
Speaker 1: dollar as a tail risk hedge as you described. I mean,
Speaker 1: the most popular press covered this ethics deposit instrument the most,
Speaker 1: but there were two other things in there as well.
Speaker 1: The main piece in that package was an instrument that
Speaker 1: completely replicates the payoff structure that tailhage. So if you
Speaker 1: deposit your money and through this new instrument and the
Speaker 1: US de lira exchange rates does not depreciate more than
Speaker 1: the prevailing central bank interest rate, you're gonna receive the
Speaker 1: central bank interest rate. But if it literally depreciates more
Speaker 1: than that interest rates, you're going to be paid for that.
Speaker 1: So if literally depreciates eight and the interest rate prevailing
Speaker 1: interest rate is fourteen percent, either the Treasury or the
Speaker 1: CBRT will cover your air quotes loss. There as I
Speaker 1: said it, it is a free call option on US
Speaker 1: de leer exchange. If you are getting into this instrument
Speaker 1: from your usc deposit accounts, you're going to be dealing
Speaker 1: with cb r T and CBRT will be covering your loss.
Speaker 1: And if you have already a lirac condition you put
Speaker 1: your liric account money to into this new instrument, you're
Speaker 1: going to be dealing with the Treasury and they will
Speaker 1: be covering the losses. And why did they do this
Speaker 1: Probably because you know, if it's already a USD deposit,
Speaker 1: dealing with the CBRT directly is easier. It becomes a
Speaker 1: CBRT reserve dat amounts. And if you have a Lira accounts,
Speaker 1: dealing with the Treasury is easier because you know there's
Speaker 1: nothing for the central thing to do, and it is
Speaker 1: some sort of a risk sharing program because if you know,
Speaker 1: half of the new money into this instrument comes from
Speaker 1: already US accounts and the risk comes from Turkish there accounts,
Speaker 1: the treasury will not be assuming that much risk, which
Speaker 1: was the main discussion point in the press. I guess
Speaker 1: one of the things that people wonder is like, well,
Speaker 1: doesn't this just put pressure on the fiscal balance, taking
Speaker 1: it off the central banks balance shade, putting out on
Speaker 1: the fiscal balance. We've seen Turkish credit default swaps rise
Speaker 1: in recent days. Perhaps why does this actually fundamentally change
Speaker 1: anything rather than just as you put it, um, you know,
Speaker 1: shift risk away from the central bank to the treasury.
Speaker 1: Joey's it works. It actually decreases I think will decrease
Speaker 1: the CDs premiums because it transforms balance of payments issue
Speaker 1: to a fiscal issue, and that fiscal issue is completely
Speaker 1: denominated in Turkish lyrists. It is something you can print
Speaker 1: and it should degrees risk in your foreign currency of liabilities.
Speaker 1: And did it? This is the direct interpretation. If you
Speaker 1: use the framework, if you somehow solve the dollarization issue,
Speaker 1: if you if you're able to create this kitchen sync
Speaker 1: so whenever you issue new lera loans, you do you
Speaker 1: do not have to deal with the dollarization pressure. It
Speaker 1: will be the first time in I said this in
Speaker 1: the beginning, but it will be the first time in
Speaker 1: Turkish history that the growth goal of the policy maker
Speaker 1: and the price stability goal of the central bank are
Speaker 1: not going to be in direct contradiction. So that is
Speaker 1: why I think it it is hugely risk positive. So
Speaker 1: in other words, it sounds like basically what you're saying,
Speaker 1: if I could just sort of essentially, this creates a
Speaker 1: way for Turkish household to have a tail risk hedge
Speaker 1: that doesn't involve automatically buying dollars, Yes, yes, that is yes.
Speaker 1: So can I just ask just on the fiscal question
Speaker 1: and whether or not this is going to impact Turkey's
Speaker 1: balance sheet, which has been you know, one of the
Speaker 1: bright spots of the Turkish economy recently. So one of
Speaker 1: the perhaps unfair things about the way the world currently
Speaker 1: works is that foreign investors do have an enormous amount
Speaker 1: of power on emerging market economies in particular, and this
Speaker 1: is you know, part of the problem of what's happened
Speaker 1: in Turkey is that we have bond vigilantes or inflation
Speaker 1: vigilantes who have gotten nervous about what's happening there and
Speaker 1: have you know, put additional pressure on the currency. So
Speaker 1: I guess my question is how is Turkey going to
Speaker 1: at foreign investors on side for a new currency stability
Speaker 1: mechanism that people are unfamiliar with and which on the
Speaker 1: surface looks like it's going to diminish the country's fiscal
Speaker 1: ability or fiscal strength. I think they're basically three scenarios. First,
Speaker 1: if the take up rate of this new instrument is low,
Speaker 1: that means the treasury is not assuming that much risk
Speaker 1: that will be did you boy? I guess if the
Speaker 1: take up rate is high because of the current stock
Speaker 1: of foreign investment Disturkey, which which is extremely low, especially
Speaker 1: in bonds, it is almost non existent, and they I
Speaker 1: mean foreigners can almost completely lift the swaps as well.
Speaker 1: There is some amount of investment iniquities, but that is
Speaker 1: for some reason rather stable. I mean that lived through
Speaker 1: any type of crisis we had in the last four
Speaker 1: or five years in looting the twenty eighteen prices. So
Speaker 1: if you assume that equity stock, who is going to
Speaker 1: be stable going forward? I don't think foreign investors matter
Speaker 1: that much. So that leaves dollarization and current accounts as
Speaker 1: the determinants of reserves. Then the exchange yates. So if
Speaker 1: you if the take up rate is high and currently
Speaker 1: the Church economy is having current account surpluses, and our
Speaker 1: internal analyses show that for their first time in September,
Speaker 1: as far as I remember, Turkey had a seasonally adjusted
Speaker 1: current account surplus. This is especially positive because Turkey is
Speaker 1: a huge commodity importer and despite the global commodity prices
Speaker 1: sky racting, Turkey is able to have current count surpluses,
Speaker 1: so that's good. That leaves the dollarization and if the
Speaker 1: take up rate is high here, that's that means the
Speaker 1: totalization issue is getting resolved. In that case you will
Speaker 1: not have ANFX pressure, so the treasury you will not
Speaker 1: have much to deal with there either. So the last
Speaker 1: case is some exogenous shock that is unpredictable. Can it happen?
Speaker 1: It can, but I don't think this mechanism increasing the
Speaker 1: you know, pressure on the treasury and increasing the risk
Speaker 1: there is a very assessment based on the base cases.
Speaker 1: You know, the world is an interesting place. Some incredible
Speaker 1: thing might happen, but it's not my base case, let's
Speaker 1: phrase it like that. Can you just expect real quickly?
Speaker 1: You mentioned Turkey as a commodity importer. Uh, commodities are
Speaker 1: very high. Howard's current Howard Turkey currently running a current account. Surplus.
Speaker 1: Services are induced surplus, mainly tourism. And you know, one
Speaker 1: good thing about Turkish tourism is it it's elasticity to
Speaker 1: the real effective exchange. It is pretty high. So when
Speaker 1: you depreciate your currency, you get more bank for your
Speaker 1: buck than what you have in the good side. So
Speaker 1: that is a huge positive. And if COVID is you know,
Speaker 1: if coal is not going to be a huge issue
Speaker 1: in the near future, which I think it will not be,
Speaker 1: but you know, that's a debate. Turkey will keep giving
Speaker 1: current account of surpluses. One risk is, yeah, imports are
Speaker 1: way higher because of the community prices, but exports are
Speaker 1: higher as well because the global economy was staging an
Speaker 1: impressive recovery. If some have the global central bank moves
Speaker 1: decrease that, you know, hurt that recovery more than they
Speaker 1: decrease communty prices. Turkey might have some issues, but again
Speaker 1: that's not my space out there or anything. Come on,
Speaker 1: two prices are much more susceptible to the USD cycle
Speaker 1: than global growth. So I'm overall optimistic about the future
Speaker 1: curan ticun of situation in Turkey. I guess my next
Speaker 1: question is when would we expect to see or would
Speaker 1: we expect to see published take up figures for the
Speaker 1: new m X plan. And then secondly, what are you
Speaker 1: watching in order to see whether or not it's working?
Speaker 1: And I realized, you know, watching the lira would be
Speaker 1: the obvious thing to do. But are you looking at
Speaker 1: the take up figures or I don't know, maybe pressure
Speaker 1: on Turkey's foreign reserves or something like that to see
Speaker 1: whether or not, uh, this is actually pressuring Turkey's fiscal position. Well,
Speaker 1: there's one main thing I'm looking at. I mean, the
Speaker 1: equation I talked about is more or less than identity.
Speaker 1: So I look at the difference between new literal loan
Speaker 1: shoeings minus the new deposits in Neurope. So if that
Speaker 1: is not a huge number, that means things are going well,
Speaker 1: we are not burning that much you know that many reserves.
Speaker 1: If that number is giving negative signals, that means dollarization, shoot,
Speaker 1: dollalization pressure is still there despite the current accome surplus,
Speaker 1: so that might be alarming, and I'm going to keep
Speaker 1: watching that number going forward. You know, it's interesting because
Speaker 1: earlier Tracy asked about what it would take to sort
Speaker 1: of get foreign capital on side. But to my you know,
Speaker 1: like the question that I'm sort of wondering about is
Speaker 1: this sort of like I guess, the domestic take up.
Speaker 1: I mean, basically what Tracy just asked, this domestic take up?
Speaker 1: How much understanding does there have to be and how
Speaker 1: much convincing from this sort of government, from banks to
Speaker 1: retail depositors, to the public to the depositors about how
Speaker 1: these new mechanisms will work, and how does the how
Speaker 1: do the banks and government establish credibility that this uh
Speaker 1: you know, this free put or this free dollar lyric
Speaker 1: call option that they're being offered is actually going to
Speaker 1: be given to them? How is there a credibility risk
Speaker 1: on that side after such a hugely mulatile period, there
Speaker 1: is a risk of credibility deficit. The fiscal positive position
Speaker 1: of Turkey is you know, I mean, it's Tracy put
Speaker 1: it one of his biggest strengths. So that argument and
Speaker 1: the basic structure of the new instrument should suffice. It
Speaker 1: is almost a no brainer. Excuse my language, but you're
Speaker 1: being offered lira interest rates on effects deposits. Basically, effects
Speaker 1: deposits currently pay like one and lira pays around and
Speaker 1: you are hasty against any upside in U S delera exchange,
Speaker 1: and so it is a complete no brainer. I think
Speaker 1: people will want to see, you know, their friends or
Speaker 1: and family who got into this instrument getting paid first,
Speaker 1: and after that, I think the take up rate will increase.
Speaker 1: By the way, the Treasury Ministry today announced that, uh,
Speaker 1: there was you know, about ten billion lyrists up until
Speaker 1: now that got in to this new instrument. I don't
Speaker 1: know if they're gonna regularly publish the figures about this,
Speaker 1: but you know, we have this state at this moment.
Speaker 1: You know, one question I have. It seems to me,
Speaker 1: and I don't know if this is if I'm thinking
Speaker 1: about this exactly right, but it seems to me that
Speaker 1: it's one of these things where if it works, it
Speaker 1: will in theory wouldn't even be necessary. So you offer
Speaker 1: these special effects hedged accounts. Basically some people have described
Speaker 1: them as like tips meat c d s and obviously,
Speaker 1: as you put it, a three dollarlier call option. But
Speaker 1: it seems to me that the in theory, if it works,
Speaker 1: you don't actually need people to transfer the money into
Speaker 1: these accounts because the existence of these accounts is essentially
Speaker 1: stemmed the sell off. Is that a sort of like
Speaker 1: fair characterization or is that something that victory would look like?
Speaker 1: That is a completely fair characterization, and it is basically
Speaker 1: how it went in other countries that applied similar schemes,
Speaker 1: like Brazil and Israel. There's a lot of talk about,
Speaker 1: you know, what tricky is doing, has tried before and
Speaker 1: it failed, things like that. You know, I'd like to
Speaker 1: address that because there's a crucial difference. That's why I
Speaker 1: think they diagnosed a proba right, because this is strictly
Speaker 1: limited to real people. This excludes corporates, this exclude foreigners.
Speaker 1: Because there were some schemes in Argentina, there was some
Speaker 1: there was one in Turkey's past and like seventies or
Speaker 1: something that targeted folks living abroad, and that is a
Speaker 1: short fire way of creating a balance of payments issue
Speaker 1: because if her target group has a balance sheet denominated
Speaker 1: in a foreign currency, anytime they want to take their
Speaker 1: money out, you're gonna have issues with your reserves. But
Speaker 1: because This is just you know, exclusively for local folks
Speaker 1: who consume goods in Turkish lyra, and you know they
Speaker 1: care about the Turkish lyra. They do not care about there.
Speaker 1: They do not have a foreign currency denominated balance sheet.
Speaker 1: That is why I think they got it right, and
Speaker 1: that is why I think this has a chance of working.
Speaker 1: Because wherever it work, like in Brazil and Israel, this
Speaker 1: is why it worked. They did not target foreigners. They
Speaker 1: targeted to locals. They tried to solve dollarization. They did
Speaker 1: not want to attract form in flows because if you
Speaker 1: want to attract formnin flows sustainably, this is a bad
Speaker 1: way of doing that. If you want to solve dollarization.
Speaker 1: Just this word. Thank you so much that I genuinely
Speaker 1: learned a lot from that conversation. Thank you for having me.
Speaker 1: But yeah, that was great. Thanks, that was really interesting.
Speaker 1: I felt that extremely helpful. It's pretty complicated, obviously, and
Speaker 1: you know when sometimes in all these conversations my head
Speaker 1: can hurt thinking about you know, the capital account, the
Speaker 1: current account and all this. But this idea of understanding
Speaker 1: that understanding this new scheme is like you know, a
Speaker 1: tail risk hedge. Very interesting and very definitely helped me
Speaker 1: understand the situation better. Yeah. Also your question about um
Speaker 1: sort of the less people use it, the more it
Speaker 1: might work. That kind of reminded me of the FEDS
Speaker 1: corporate bond buying program from last year, where it actually
Speaker 1: didn't end up buying that many corporate bonds because it
Speaker 1: didn't need to. Just the promise of coming in and
Speaker 1: stabilizing the market had the effect of stabilizing the market.
Speaker 1: But that said, it's clearly a big bet on people
Speaker 1: actually believing in this mechanism, right, and if it goes
Speaker 1: the other way, if there's a massive take up and uh,
Speaker 1: you know, the Turkish government ends up having to monetize
Speaker 1: it's funding for that, then then you could see it
Speaker 1: being a problem. This is exactly right, And I think
Speaker 1: you know, if you think about first of all, you
Speaker 1: mentioned the corporate bond buying program, also the municipal bond
Speaker 1: buying program would also put m the o MT in
Speaker 1: the Euro Area crisis, very similar thing. This idea of
Speaker 1: like if you make a credible enough promise, you actually
Speaker 1: never have to spend any money is sort of like
Speaker 1: one of these core like ideas in uh, sort of
Speaker 1: like central banking, and it's like this too. It's like, Okay,
Speaker 1: we credibly promised to compensate you if the lyric plunges,
Speaker 1: so hold your money and lira. And if the promise
Speaker 1: is credible and everyone holds their money and lira, then
Speaker 1: you don't have the problem of the lyric plunging and
Speaker 1: you solve the dollarization problem, which could be huge. So
Speaker 1: that's like a really interesting way that was really helpful
Speaker 1: to think about it. But as you said just now,
Speaker 1: like it is a really big bet because the fear,
Speaker 1: it seems to me, would be you have a significant
Speaker 1: portion of the population taken up essentially like take up
Speaker 1: this insurance, but then you also have a significant portion
Speaker 1: of the population who like if they continue to dollarize
Speaker 1: in the lira, uh continue where to continue to plunge,
Speaker 1: and then the government is on the hook for this
Speaker 1: big put option that it's given everyone or a call option. However,
Speaker 1: depending on which side of the pea trade you're talking about,
Speaker 1: then you could see it being like a very costly
Speaker 1: bed from the fiscal perspective totally. And I know you
Speaker 1: and I have both spoken about this already, but it
Speaker 1: is a little bit reminiscent of certain cryptocurrencies that tell
Speaker 1: everyone to you know, hoddle or if everyone just holds
Speaker 1: on and never sells, everyone is going to benefit. There
Speaker 1: is a threat of that in there. They're definitely there's gay.
Speaker 1: It's gay. I mean it's exactly right because like the
Speaker 1: sort of like the game theory of crypto, it's like
Speaker 1: we all go to the one side of the payoff matrix,
Speaker 1: we all win. It does feel like there is like
Speaker 1: an element of game theory, and it really is going
Speaker 1: to seem does the government have the credibility to get
Speaker 1: everyone into this one corner of the matrix or enough
Speaker 1: people that it stems the decline? But look like it
Speaker 1: was a huge rally in the era when they announced that,
Speaker 1: and so there is obviously litla point out some sort
Speaker 1: of like wow this potentially it could be a game changer. Yeah, um,
Speaker 1: it's working so far, but obviously we'll have to keep
Speaker 1: an eye on it. Yeah, alright, shall we leave it there,
Speaker 1: Let's leave it there. Okay. This has been another episode
Speaker 1: of the All Thoughts Podcast. I'm Tracy Alloway. You can
Speaker 1: follow me on Twitter at Tracy Alloway and I'm Joe
Speaker 1: wi Isn't Thal. You can follow me on Twitter at
Speaker 1: the Stalwart. Follow our producer on Twitter, Laura Carlson. She's
Speaker 1: at Laura M. Carlson. Followed the Bloomberg head of podcast
Speaker 1: Francesca Levi at Francesca Today and check out all of
Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks
Speaker 1: for listening year