1
00:00:10,960 --> 00:00:15,640
Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.

2
00:00:15,840 --> 00:00:21,759
Speaker 1: I'm Joe Wisenthal. Unfortunately my colleague Tracy Alloway is out today,

3
00:00:22,040 --> 00:00:24,680
Speaker 1: so it will just be me. But I'm very excited,

4
00:00:24,840 --> 00:00:28,880
Speaker 1: nonetheless about this episode because we're going to continue speaking

5
00:00:29,280 --> 00:00:33,279
Speaker 1: about one of the more interesting and complicated, at least

6
00:00:33,280 --> 00:00:36,680
Speaker 1: seems complicated stories developing right now in markets, and that

7
00:00:36,960 --> 00:00:42,120
Speaker 1: is the situation in Turkey. And if you haven't already,

8
00:00:42,159 --> 00:00:45,080
Speaker 1: a couple of weeks ago, we published an episode with

9
00:00:45,120 --> 00:00:49,080
Speaker 1: the economist Fila Bingal based in a in a bank

10
00:00:49,280 --> 00:00:54,400
Speaker 1: and in Istanbul, basically walking through some of the measures

11
00:00:54,400 --> 00:00:58,520
Speaker 1: that the air Delan government has taken recently to stabilize

12
00:00:58,560 --> 00:01:01,400
Speaker 1: the lira. And of course the lira had a pretty

13
00:01:01,560 --> 00:01:06,920
Speaker 1: terrible one. It feels like, as we said on that episode,

14
00:01:06,920 --> 00:01:09,840
Speaker 1: that every nine months, every year, every year and a half,

15
00:01:09,880 --> 00:01:12,800
Speaker 1: there's a pretty big episode in Turkey where the currency

16
00:01:12,840 --> 00:01:20,320
Speaker 1: plunges and the government engages in seemingly unorthodox monetary policy. Nonetheless,

17
00:01:20,640 --> 00:01:25,080
Speaker 1: none of it seems to have worked. Inflation is extremely high,

18
00:01:25,200 --> 00:01:28,080
Speaker 1: and so the argument is or the attempt by the

19
00:01:28,120 --> 00:01:33,160
Speaker 1: government is to discourage domestic savers from moving their money

20
00:01:33,280 --> 00:01:36,480
Speaker 1: into into dollars and to hold their money in lira.

21
00:01:37,040 --> 00:01:39,240
Speaker 1: So far, you know, this has been a goal for

22
00:01:39,280 --> 00:01:43,800
Speaker 1: a while. Turkey is a heavily dollarized economy by and large,

23
00:01:43,840 --> 00:01:47,600
Speaker 1: though nothing has has worked. So I would encourage people

24
00:01:47,640 --> 00:01:51,160
Speaker 1: to listen to that episode for a discussion of the mechanics.

25
00:01:51,200 --> 00:01:54,000
Speaker 1: But of course anything new is bound to be very controversial,

26
00:01:54,080 --> 00:01:55,960
Speaker 1: and there's a lot of views and a lot of

27
00:01:56,000 --> 00:02:01,520
Speaker 1: skepticism about whether anything will improve with the new measures. Uh,

28
00:02:01,520 --> 00:02:04,280
Speaker 1: And so we want to continue on the topic. And

29
00:02:04,320 --> 00:02:06,680
Speaker 1: of course in the last episode we spoke to an

30
00:02:06,680 --> 00:02:10,200
Speaker 1: economist at a Turkish bank, but this time we want

31
00:02:10,280 --> 00:02:13,000
Speaker 1: to get the perspective that's a little bit more international

32
00:02:13,080 --> 00:02:17,640
Speaker 1: from the international investing community. And I'm extremely excited about

33
00:02:18,480 --> 00:02:21,320
Speaker 1: our guest. He's been on the podcast two or three

34
00:02:21,360 --> 00:02:25,119
Speaker 1: times in the past, often helping us understand what's going

35
00:02:25,160 --> 00:02:28,600
Speaker 1: on in the e M and I think we've even

36
00:02:28,680 --> 00:02:34,120
Speaker 1: talked Turkey specifically before, maybe in eighteen or nine. Nonetheless,

37
00:02:34,840 --> 00:02:38,040
Speaker 1: very excited to welcome back to the show Paul McNamara.

38
00:02:38,160 --> 00:02:43,280
Speaker 1: He's an investment director at GAM, longtime specialist in emerging markets,

39
00:02:43,400 --> 00:02:47,320
Speaker 1: and so we're going to dive right in. So Paul

40
00:02:47,480 --> 00:02:51,480
Speaker 1: welcome back to odd lots, thanks very much. Before we

41
00:02:51,560 --> 00:02:57,240
Speaker 1: even get to the current measures and the current mechanisms

42
00:02:57,280 --> 00:02:59,239
Speaker 1: that the government has put in place to attempt to

43
00:02:59,240 --> 00:03:04,639
Speaker 1: stabilize the lira, how would you characterize the long term

44
00:03:04,800 --> 00:03:07,840
Speaker 1: issues facing the country? Why is it in your view

45
00:03:07,880 --> 00:03:11,760
Speaker 1: that we seemingly come back to Turkey in particular, I

46
00:03:11,800 --> 00:03:14,280
Speaker 1: don't know, every year or every year and a half

47
00:03:14,639 --> 00:03:18,919
Speaker 1: during some episode of high inflation and extreme currency of volatility.

48
00:03:20,360 --> 00:03:23,440
Speaker 1: It's it's something that tends to be particularly true of

49
00:03:23,560 --> 00:03:26,120
Speaker 1: countries which have a habit of getting themselves into trouble.

50
00:03:26,680 --> 00:03:29,920
Speaker 1: Turkey isn't remotely in as much trouble as Argentina, but

51
00:03:30,880 --> 00:03:33,840
Speaker 1: the mindset there is the same. Is that if you

52
00:03:33,960 --> 00:03:39,680
Speaker 1: know a country is prone to or more corrections in

53
00:03:39,680 --> 00:03:44,520
Speaker 1: the currency, to overnight huge rises in infrastrates or big

54
00:03:44,640 --> 00:03:48,000
Speaker 1: drops in bond prices, you tend to be to react

55
00:03:48,160 --> 00:03:51,800
Speaker 1: much faster. And this goes as much for people with

56
00:03:51,840 --> 00:03:54,080
Speaker 1: a bit of money in the bank, do they switch

57
00:03:54,400 --> 00:03:58,560
Speaker 1: their money from lira's to dollars or back again, or

58
00:03:58,560 --> 00:04:01,080
Speaker 1: take their money out of the bank. You know, when

59
00:04:01,120 --> 00:04:03,880
Speaker 1: you get this much volatility, it kind of creates its

60
00:04:03,880 --> 00:04:07,640
Speaker 1: own volatility because people feel the need to react much faster,

61
00:04:08,000 --> 00:04:10,880
Speaker 1: and just that willingness to react more quickly kind of

62
00:04:10,960 --> 00:04:14,200
Speaker 1: creates sort of enhances the volatility, So you get into

63
00:04:14,240 --> 00:04:19,160
Speaker 1: this kind of volatility promoting spiral. Now, how much of

64
00:04:19,200 --> 00:04:23,120
Speaker 1: this spiral would you say is a function of, say,

65
00:04:23,200 --> 00:04:26,599
Speaker 1: domestic institutions, and of course people perceive the Air Douan

66
00:04:26,680 --> 00:04:30,760
Speaker 1: government to be engaged in I would say, highly unorthodox

67
00:04:30,960 --> 00:04:36,120
Speaker 1: views of how monetary policy works, lowering rates, blaming high

68
00:04:36,200 --> 00:04:38,520
Speaker 1: rates for high inflation, et cetera. How much of this

69
00:04:38,640 --> 00:04:43,440
Speaker 1: spiral is sort of the government disinclination towards more orthodox

70
00:04:43,480 --> 00:04:48,200
Speaker 1: policies versus sort of more behavioral explanations on the part

71
00:04:48,320 --> 00:04:54,000
Speaker 1: of Turkish savers and their disinclination to hold lira, Like, what,

72
00:04:54,000 --> 00:04:58,120
Speaker 1: what is why in particular does Turkey seem to exhibit

73
00:04:58,200 --> 00:05:01,680
Speaker 1: this this doom loop? I mean, I think I think

74
00:05:01,680 --> 00:05:04,520
Speaker 1: it's really interesting because it's it's kind of unusual to

75
00:05:04,520 --> 00:05:08,000
Speaker 1: have a crisis which is which is largely voluntary. It's

76
00:05:08,120 --> 00:05:09,919
Speaker 1: it's not like you have to do some sort of

77
00:05:09,920 --> 00:05:12,599
Speaker 1: thought experiment. You know that what would be the counter

78
00:05:12,640 --> 00:05:16,000
Speaker 1: factual if Turkey at higher interest rates? Because we know

79
00:05:16,120 --> 00:05:21,200
Speaker 1: that that before President Hrderhan sacked rag Ball, the previous

80
00:05:21,240 --> 00:05:24,239
Speaker 1: head of the Central Bank. We had much higher interest rates,

81
00:05:24,520 --> 00:05:27,160
Speaker 1: and we had a liraer that had been appreciating solidly

82
00:05:27,240 --> 00:05:30,440
Speaker 1: for a couple of months. So in terms of the

83
00:05:30,920 --> 00:05:35,480
Speaker 1: trigger for this this particular situation, it's entirely I think

84
00:05:35,520 --> 00:05:38,560
Speaker 1: on the on the shoulders of the government that they

85
00:05:38,600 --> 00:05:42,240
Speaker 1: decided that they were going to sort of play play games.

86
00:05:42,320 --> 00:05:44,039
Speaker 1: I think it is maybe a little bit casual that

87
00:05:44,080 --> 00:05:47,799
Speaker 1: they decided that, you know, that they could conduct a

88
00:05:47,839 --> 00:05:51,560
Speaker 1: complete experiment in monetary policy. I mean, I think there

89
00:05:51,560 --> 00:05:56,200
Speaker 1: are longer term reasons why Turkey has been particularly prone

90
00:05:56,720 --> 00:06:00,920
Speaker 1: to this boom bus cycle. It's a country where the

91
00:06:00,960 --> 00:06:04,960
Speaker 1: external deficit, you know, dips on a regular basis into

92
00:06:05,000 --> 00:06:09,920
Speaker 1: into deficit, into very substantial deficit. It's got much much

93
00:06:09,960 --> 00:06:13,880
Speaker 1: lower level of foreign exchange reserves than pretty much any

94
00:06:13,920 --> 00:06:17,040
Speaker 1: of the other big e ms except maybe South Africa,

95
00:06:17,600 --> 00:06:20,960
Speaker 1: you know, so it has fewer natural safeguards. I mean,

96
00:06:21,080 --> 00:06:25,520
Speaker 1: I think the history of the volatility makes the consequences

97
00:06:25,839 --> 00:06:30,760
Speaker 1: of policy experiments more serious. But you know, primarily the

98
00:06:30,880 --> 00:06:34,520
Speaker 1: you know, the recent huge amount of volatility was a

99
00:06:34,560 --> 00:06:38,960
Speaker 1: political choice by the government. So why is that like

100
00:06:39,279 --> 00:06:42,400
Speaker 1: when we talk about these ems that flare up of

101
00:06:42,480 --> 00:06:45,920
Speaker 1: the news from time to time in Turkey, South Africa,

102
00:06:46,200 --> 00:06:50,360
Speaker 1: Brazil from time to time. What is it a structurally

103
00:06:50,400 --> 00:06:54,080
Speaker 1: and you mentioned the lack of foreign exchange reserves and

104
00:06:54,279 --> 00:06:57,679
Speaker 1: the sort of the thin cushion that the country has.

105
00:06:57,839 --> 00:07:01,520
Speaker 1: Is there something structural about well, what is it that

106
00:07:01,600 --> 00:07:05,080
Speaker 1: I guess about the way the Turkish economy is structured

107
00:07:05,160 --> 00:07:08,599
Speaker 1: in terms of domestic industry and so forth, such that

108
00:07:08,800 --> 00:07:13,400
Speaker 1: it maintains these vulnerabilities And in your view, does a

109
00:07:13,520 --> 00:07:19,640
Speaker 1: policy exist there could reverse some of these factors. Yeah,

110
00:07:19,640 --> 00:07:23,400
Speaker 1: I mean, I think the very substantial role for foreign currency,

111
00:07:23,400 --> 00:07:26,840
Speaker 1: and especially the US dollar is definitely something that makes

112
00:07:26,880 --> 00:07:31,360
Speaker 1: Turkey much more vulnerable. You know that depositors regularly switched

113
00:07:31,400 --> 00:07:35,160
Speaker 1: their money between lira and dollars depending on, you know,

114
00:07:35,520 --> 00:07:37,520
Speaker 1: what they perceive the outlook for the currency to be.

115
00:07:37,880 --> 00:07:40,280
Speaker 1: But probably more important is that an awful lot of

116
00:07:40,280 --> 00:07:43,280
Speaker 1: the on shore debt is in US dollars. So not

117
00:07:43,360 --> 00:07:46,720
Speaker 1: only do Turkish depositors keep a decent chunk of their

118
00:07:46,760 --> 00:07:49,800
Speaker 1: savings in well, I'll keep saying dollars. I mean it

119
00:07:49,840 --> 00:07:53,720
Speaker 1: does include especially euros. There's a few other currencies, but

120
00:07:53,760 --> 00:07:58,960
Speaker 1: we'll say dollars for simplicity, is that not just genuine

121
00:07:59,000 --> 00:08:02,600
Speaker 1: foreign debt, I mean debt owed to external institutions, but

122
00:08:02,680 --> 00:08:07,680
Speaker 1: also on shore. The Turkish banks lend dollars to domestic borrowers.

123
00:08:07,920 --> 00:08:09,680
Speaker 1: And if you owe, if you owe a lot of

124
00:08:09,720 --> 00:08:13,240
Speaker 1: dollars and the liraa plunges, then you're going to end

125
00:08:13,320 --> 00:08:17,160
Speaker 1: up chasing the lera. And that's especially true if if

126
00:08:17,200 --> 00:08:21,200
Speaker 1: you're say running real estate or something like that, something

127
00:08:21,240 --> 00:08:23,520
Speaker 1: without a natural stream of dollars. I mean, if you're

128
00:08:23,560 --> 00:08:25,680
Speaker 1: a big exporter, then I think it makes a lot

129
00:08:25,680 --> 00:08:27,400
Speaker 1: of sense your revenues are and dollars, It makes a

130
00:08:27,400 --> 00:08:29,560
Speaker 1: lot of sense to have your debt in dollars. But

131
00:08:29,840 --> 00:08:32,560
Speaker 1: in Turkey, you know, a big it's got a very

132
00:08:32,679 --> 00:08:37,760
Speaker 1: very strong and well I mean not always vibrant real

133
00:08:37,880 --> 00:08:40,280
Speaker 1: estate sector. You know, for a couple of years, I

134
00:08:40,280 --> 00:08:44,880
Speaker 1: mean before COVID, the share of real estate construction was

135
00:08:44,960 --> 00:08:48,120
Speaker 1: ticking up towards the level we saw before the euro

136
00:08:48,200 --> 00:08:52,000
Speaker 1: crisis in places like Spain. And if you're borrowing dollars

137
00:08:52,240 --> 00:08:55,800
Speaker 1: without a natural source of dollars, then then the very

138
00:08:55,800 --> 00:08:58,800
Speaker 1: big role of the dollar in the economy is going

139
00:08:58,840 --> 00:09:02,800
Speaker 1: to create volatility in itself, because it does mean that

140
00:09:02,840 --> 00:09:06,480
Speaker 1: when the dollar strengthens, instead of making people look, oh,

141
00:09:06,559 --> 00:09:09,360
Speaker 1: the dollar is expensive, I won't buy some now, it's

142
00:09:09,520 --> 00:09:12,680
Speaker 1: I desperately need these dollars, and if it moves even more,

143
00:09:12,720 --> 00:09:15,160
Speaker 1: I'm going to be even further underwater. So I think

144
00:09:15,160 --> 00:09:17,640
Speaker 1: the big role of the dollar, not just on the

145
00:09:17,679 --> 00:09:19,880
Speaker 1: deposit side, but also on the death side, is very

146
00:09:19,920 --> 00:09:23,480
Speaker 1: important there. So this gets to you know, this sort

147
00:09:23,480 --> 00:09:26,640
Speaker 1: of this gets to our discussion in our last episode

148
00:09:26,800 --> 00:09:31,359
Speaker 1: in Turkey, which is people look at Turkey and they say, Okay,

149
00:09:31,520 --> 00:09:34,679
Speaker 1: what's what's all this? You know, cutting interest rates where

150
00:09:34,679 --> 00:09:38,200
Speaker 1: they should be hiking them, and diminishing the independence of

151
00:09:38,240 --> 00:09:40,600
Speaker 1: the central bank, sacking the central bank, and so forth.

152
00:09:41,120 --> 00:09:44,040
Speaker 1: But how much is the core issue really the high

153
00:09:44,240 --> 00:09:48,520
Speaker 1: level of dollarization? And is there an argument that nothing

154
00:09:48,640 --> 00:09:52,320
Speaker 1: can be solved or no stability can be achieved until

155
00:09:52,400 --> 00:09:56,640
Speaker 1: that's reversed in some manner. It's fairly clear that you

156
00:09:56,679 --> 00:10:00,679
Speaker 1: know that that the high level of dollarization creates more volatility.

157
00:10:00,720 --> 00:10:05,000
Speaker 1: It makes any bad policy decision, any big external change,

158
00:10:05,040 --> 00:10:06,960
Speaker 1: you know, be a spike in the oil price or

159
00:10:06,960 --> 00:10:09,920
Speaker 1: something like that, it will generate more volatility in a

160
00:10:10,000 --> 00:10:13,760
Speaker 1: highly dollarized economy like Turkey. But you know, I mean,

161
00:10:13,800 --> 00:10:17,120
Speaker 1: dollarization is by no means unique to Turkey. You know

162
00:10:17,160 --> 00:10:20,080
Speaker 1: that we've seen, I mean, most of the economies of

163
00:10:20,280 --> 00:10:23,760
Speaker 1: Central Europe were to a significant degree, maybe not to

164
00:10:23,760 --> 00:10:26,920
Speaker 1: the same degree as Turkey. You know, oriented to know,

165
00:10:26,960 --> 00:10:30,319
Speaker 1: first the deutsch Mark and and later the Euro. You know,

166
00:10:30,360 --> 00:10:32,599
Speaker 1: there was a huge role for foreign debt in the

167
00:10:33,120 --> 00:10:36,319
Speaker 1: Asian financial crisis. Going back a bit further, a lot

168
00:10:36,360 --> 00:10:39,120
Speaker 1: of Latin America still has a significant role of dollar

169
00:10:39,640 --> 00:10:43,800
Speaker 1: for dollarization. But you know, an awful lot of countries

170
00:10:44,120 --> 00:10:47,400
Speaker 1: across the emerging world have managed to reduce the level

171
00:10:47,400 --> 00:10:51,120
Speaker 1: of dollarization in their economies. And that happens when they

172
00:10:51,200 --> 00:10:55,880
Speaker 1: just managed to maintain macroeconomic stability. I mean, the one

173
00:10:55,880 --> 00:10:59,320
Speaker 1: thing we haven't mentioned yet is inflation. But the current

174
00:11:00,000 --> 00:11:02,120
Speaker 1: crash or whatever you want to call it, is primarily

175
00:11:02,120 --> 00:11:06,080
Speaker 1: about inflation. I mean, nobody really cares that much. You

176
00:11:06,080 --> 00:11:08,880
Speaker 1: know that there's no suggestion if you look globally that

177
00:11:09,000 --> 00:11:12,680
Speaker 1: foreign investors demand a certain level of real of real

178
00:11:12,760 --> 00:11:16,800
Speaker 1: interest rates generally to to put money into a foreign economy,

179
00:11:16,880 --> 00:11:20,160
Speaker 1: or that you know, domestics will always prefer to have,

180
00:11:20,240 --> 00:11:22,600
Speaker 1: you know, to hold foreign currency. If real interest rates

181
00:11:22,600 --> 00:11:25,160
Speaker 1: get too low. But in the specific situation we have

182
00:11:25,280 --> 00:11:28,439
Speaker 1: here where inflation is is well. I mean, even before

183
00:11:28,480 --> 00:11:33,079
Speaker 1: the latest round of nightmarish numbers, inflation was already very high.

184
00:11:33,360 --> 00:11:37,840
Speaker 1: And have this perception that any sort of orthodox policy

185
00:11:37,920 --> 00:11:41,280
Speaker 1: or not even or even an unorthodox policy which had

186
00:11:41,320 --> 00:11:43,800
Speaker 1: some kind of logic behind it, you know, that there

187
00:11:43,840 --> 00:11:47,600
Speaker 1: was no possibility of anything like that. That's what's kind

188
00:11:47,600 --> 00:11:49,920
Speaker 1: of creating its own kind of spiral because we saw

189
00:11:49,960 --> 00:11:52,240
Speaker 1: the big drop in the lira, and the result of

190
00:11:52,280 --> 00:11:55,320
Speaker 1: that is that the latest CPI that was announced was

191
00:11:55,360 --> 00:11:58,400
Speaker 1: thirty six percent year on year, including thirteen and a

192
00:11:58,440 --> 00:12:01,160
Speaker 1: half percent in one month, and the p p I

193
00:12:01,559 --> 00:12:07,080
Speaker 1: is I mean, this is inflation ticking up from sort

194
00:12:07,120 --> 00:12:12,640
Speaker 1: of nuisance and you know, minus disruptive factor to something

195
00:12:12,679 --> 00:12:16,360
Speaker 1: that becomes a real problem that makes taking economic decisions,

196
00:12:16,840 --> 00:12:19,880
Speaker 1: even with the horizon of a few months, really very difficult.

197
00:12:20,240 --> 00:12:23,160
Speaker 1: The key problem is not, oh, you know, interest rate

198
00:12:23,240 --> 00:12:26,920
Speaker 1: to here rather than there. It's that inflation is very

199
00:12:27,040 --> 00:12:30,320
Speaker 1: very high and the government either doesn't have a clue

200
00:12:31,000 --> 00:12:49,960
Speaker 1: or doesn't care un inflation specifically, I mean, how much

201
00:12:50,120 --> 00:12:53,480
Speaker 1: is this is just I guess I would say the

202
00:12:53,520 --> 00:12:56,079
Speaker 1: inverse of the lyric and so how much of it

203
00:12:56,200 --> 00:13:00,200
Speaker 1: is passed through from import and so mechanistically when the

204
00:13:00,240 --> 00:13:04,600
Speaker 1: lira weekends, inflation goes up, etcetera, or other other dynamics,

205
00:13:05,640 --> 00:13:07,440
Speaker 1: there's a lot of there's a lot of other other

206
00:13:07,520 --> 00:13:10,480
Speaker 1: stuff at work. I mean, you know, as a very

207
00:13:10,600 --> 00:13:14,199
Speaker 1: very loose rule of thumb, the estimate of the past

208
00:13:14,280 --> 00:13:17,719
Speaker 1: through you know, say, is very very roughly about a

209
00:13:17,800 --> 00:13:20,200
Speaker 1: quarter or somewhere between a quarter and a fifth. So

210
00:13:20,240 --> 00:13:24,319
Speaker 1: if you get a ten percent rise in inflation, sorry,

211
00:13:24,320 --> 00:13:26,720
Speaker 1: ten percent drop in the lira, then that will probably

212
00:13:26,720 --> 00:13:28,920
Speaker 1: add somewhere between two and two and a half percent

213
00:13:29,080 --> 00:13:33,760
Speaker 1: to inflation. So it's part of it. But the factors

214
00:13:33,760 --> 00:13:36,360
Speaker 1: which are at work everywhere else in the world, which is,

215
00:13:36,640 --> 00:13:40,600
Speaker 1: you know, a huge build up of cash balances, both

216
00:13:40,640 --> 00:13:45,000
Speaker 1: of firms and individual and household levels, people being pushed

217
00:13:45,000 --> 00:13:48,080
Speaker 1: out of the economy and then suddenly kind of coming

218
00:13:48,120 --> 00:13:53,880
Speaker 1: back bottlenecks, big rise in oil prices because all energy

219
00:13:54,240 --> 00:13:58,760
Speaker 1: effectively all Turkey's energy needs are imported, which is which

220
00:13:58,800 --> 00:14:02,840
Speaker 1: is quite unusual in e M. So the lira is

221
00:14:02,840 --> 00:14:06,000
Speaker 1: a very important part of it. It's a particularly important

222
00:14:06,000 --> 00:14:10,880
Speaker 1: part in the recent big spike, but it's overlaid on

223
00:14:11,200 --> 00:14:17,120
Speaker 1: a general global reflationary picture, which I think may affect

224
00:14:17,679 --> 00:14:20,840
Speaker 1: Turkey more than more than a lot of others as well.

225
00:14:21,200 --> 00:14:23,120
Speaker 1: And of course you've got stuff like the government just

226
00:14:23,520 --> 00:14:27,800
Speaker 1: pushed through a very very big rise in the minimum wage,

227
00:14:27,840 --> 00:14:30,920
Speaker 1: for example. You know that that there's inflationary factors all

228
00:14:30,920 --> 00:14:35,080
Speaker 1: over its assuming out for a second, and you mentioned

229
00:14:35,080 --> 00:14:38,960
Speaker 1: that of course heavy dollarization is not unique to Turkeys,

230
00:14:38,920 --> 00:14:42,000
Speaker 1: so it's a factor, but it can't explain everything. And

231
00:14:42,120 --> 00:14:45,920
Speaker 1: you know that other e m s either have been

232
00:14:45,960 --> 00:14:48,800
Speaker 1: able to deal with dollarization it hasn't created the same

233
00:14:48,880 --> 00:14:51,720
Speaker 1: level of volatility, or they've actually been able to reduce

234
00:14:51,800 --> 00:14:56,920
Speaker 1: dollarization over time. What's worked, Like, is there a playbook

235
00:14:57,240 --> 00:14:59,920
Speaker 1: more broadly setting us at Turkey in what would work?

236
00:15:00,200 --> 00:15:02,720
Speaker 1: Is there a consistent playbook that you've seen in your

237
00:15:02,760 --> 00:15:04,840
Speaker 1: career watching a different ones where it's like, yes, this

238
00:15:04,960 --> 00:15:08,520
Speaker 1: is a this has been a path towards reducing the

239
00:15:08,600 --> 00:15:11,960
Speaker 1: delization and the risk that comes in there. Yeah, I

240
00:15:12,560 --> 00:15:17,080
Speaker 1: mean it's extremely simple macro stability. I mean, obviously inflation

241
00:15:17,400 --> 00:15:19,720
Speaker 1: coming down and staying down. I mean it looked as

242
00:15:19,720 --> 00:15:22,320
Speaker 1: if Turkey was well on this course. I mean, actually

243
00:15:22,360 --> 00:15:24,040
Speaker 1: the best part of a decade ago. Now, when they

244
00:15:24,120 --> 00:15:27,920
Speaker 1: got inflation well down and persistently into single digits, then

245
00:15:28,200 --> 00:15:31,200
Speaker 1: you start to see the currency stabilize, you see real appreciation.

246
00:15:32,160 --> 00:15:34,440
Speaker 1: It's not just a question of inflation. You need to

247
00:15:34,480 --> 00:15:37,400
Speaker 1: have the banking sector seen as safe. You need to

248
00:15:37,440 --> 00:15:42,000
Speaker 1: see government debt seen as effectively risk free locally, but

249
00:15:42,080 --> 00:15:45,520
Speaker 1: in a word, stability. If domestic institutions are stable, if

250
00:15:45,680 --> 00:15:49,240
Speaker 1: if domestic macro variables are stable, then people don't want

251
00:15:49,280 --> 00:15:52,600
Speaker 1: the uncertainty of owning a foreign currency, because then owning

252
00:15:52,600 --> 00:15:54,560
Speaker 1: foreign currency becomes a two way risk. You get the

253
00:15:54,600 --> 00:15:59,360
Speaker 1: domestic currency appreciating, and it's then it's the holders of

254
00:15:59,440 --> 00:16:02,480
Speaker 1: foreign cur se who get hit very hard. I mean,

255
00:16:02,680 --> 00:16:05,000
Speaker 1: a particularly good example is what happened in Poland and

256
00:16:05,080 --> 00:16:08,600
Speaker 1: Hungary from the other side, when people who had taken

257
00:16:08,920 --> 00:16:12,400
Speaker 1: mortgages in Swiss Frank's in particular, but in foreign currencies,

258
00:16:12,640 --> 00:16:16,840
Speaker 1: the volatility between foreign currencies and local currencies makes both

259
00:16:17,160 --> 00:16:21,440
Speaker 1: borrowers and lenders want to prefer domestic currency, not on

260
00:16:21,520 --> 00:16:25,760
Speaker 1: the grounds of wanting a directional move that looks after them,

261
00:16:25,880 --> 00:16:28,120
Speaker 1: but just on the grounds a certainty that you will

262
00:16:28,200 --> 00:16:31,200
Speaker 1: not you know, even in somewhere like Poland or Hungary.

263
00:16:31,480 --> 00:16:34,520
Speaker 1: You can comfortably get a move in euro's lotty or

264
00:16:34,560 --> 00:16:39,120
Speaker 1: euro euro foreignt of five six seven percent, and people

265
00:16:39,120 --> 00:16:42,680
Speaker 1: don't want that uncertainty. So I mean the natural preferences

266
00:16:42,720 --> 00:16:45,120
Speaker 1: for people to use as their unit of account the

267
00:16:45,160 --> 00:16:50,200
Speaker 1: domestic currency, and you need Turkish level disruption to chase

268
00:16:50,240 --> 00:16:54,520
Speaker 1: people out of domestic currency. This gets into when people

269
00:16:54,680 --> 00:16:58,520
Speaker 1: pinpoint are now or when they talk about the diminishing raw,

270
00:16:58,720 --> 00:17:02,600
Speaker 1: the diminishing independent of central bank, or the frequent changing

271
00:17:02,640 --> 00:17:06,480
Speaker 1: of key central bankers or ministerial points. This is where

272
00:17:06,560 --> 00:17:09,760
Speaker 1: you would say it sounds like is a real negative

273
00:17:09,920 --> 00:17:15,600
Speaker 1: contributing effect or essentially essentially the uncertainty effect. Yeah, I mean,

274
00:17:15,720 --> 00:17:18,840
Speaker 1: I mean I think it's it's it's an attitude of

275
00:17:19,000 --> 00:17:20,960
Speaker 1: the government, what kind of wants to have its cake

276
00:17:21,000 --> 00:17:24,400
Speaker 1: and eat it that they want low inflation, but they

277
00:17:24,520 --> 00:17:27,480
Speaker 1: you know, they also want high growth. They want financial

278
00:17:27,520 --> 00:17:31,000
Speaker 1: conditions which are good for the good for it well,

279
00:17:31,119 --> 00:17:34,240
Speaker 1: especially the property sector, but you know for rich people generally,

280
00:17:35,000 --> 00:17:38,800
Speaker 1: you know, and and a reluctance to to recognize, you

281
00:17:38,800 --> 00:17:41,400
Speaker 1: know that that there are tradeoffs. In economics, I mean

282
00:17:41,720 --> 00:17:45,160
Speaker 1: specifically the idea that the best way to reduce inflation

283
00:17:45,240 --> 00:17:47,680
Speaker 1: is to cut interest rates, you know, which has been

284
00:17:47,720 --> 00:17:53,280
Speaker 1: repeated and actually loud amplified as we went through December.

285
00:17:53,880 --> 00:17:56,080
Speaker 1: It just adds to the volatility. And you know, and

286
00:17:56,400 --> 00:17:59,960
Speaker 1: it's the same thing that they've intervened very heavily. We've

287
00:18:00,000 --> 00:18:03,920
Speaker 1: think that the intervention since the last couple of weeks

288
00:18:03,920 --> 00:18:08,200
Speaker 1: of November was ticking up towards twenty billion dollars and

289
00:18:08,440 --> 00:18:11,520
Speaker 1: you know, and and gross reserves are you know what

290
00:18:11,520 --> 00:18:15,760
Speaker 1: about dred and thirty billion dollars? Never mind net that

291
00:18:15,800 --> 00:18:19,159
Speaker 1: they've been running these big swap books with the domestic banks,

292
00:18:19,200 --> 00:18:23,480
Speaker 1: which distort the usefulness for the figures that under the

293
00:18:23,480 --> 00:18:26,800
Speaker 1: previous well a couple of finance ministers ago Mr al Bairack,

294
00:18:27,200 --> 00:18:31,040
Speaker 1: the state banks were de facto intervening to keep the

295
00:18:31,119 --> 00:18:36,200
Speaker 1: lira a stable. It's this incoherent mismatch of ideas based

296
00:18:36,240 --> 00:18:38,320
Speaker 1: on the idea that things are only really going wrong

297
00:18:38,359 --> 00:18:42,119
Speaker 1: from Turkey in Turkey because of foreigners, especially people like me,

298
00:18:42,560 --> 00:18:45,480
Speaker 1: and not because they have a policy setup that is

299
00:18:45,560 --> 00:18:50,480
Speaker 1: designed to produce inflation. So let's get to some of

300
00:18:50,520 --> 00:18:54,400
Speaker 1: the more recent moods, and it seems like the core

301
00:18:54,440 --> 00:18:57,919
Speaker 1: idea and again we discussed this recently is how do

302
00:18:58,200 --> 00:19:00,800
Speaker 1: give people you know, obviously they're and you you laid

303
00:19:00,800 --> 00:19:03,560
Speaker 1: it out in the beginning as well. There's this people

304
00:19:03,560 --> 00:19:06,760
Speaker 1: are very quick to buy more dollars, and there is

305
00:19:06,800 --> 00:19:09,119
Speaker 1: this sort of loop that happens the dollar strength and

306
00:19:09,119 --> 00:19:12,080
Speaker 1: people want to buy more to get these very extreme moves,

307
00:19:12,280 --> 00:19:17,240
Speaker 1: very rapid in dollar lira, and that of course destabilizing.

308
00:19:17,760 --> 00:19:20,840
Speaker 1: So the idea for the government that the government is like,

309
00:19:20,920 --> 00:19:25,160
Speaker 1: how do you give people protect lera protection without encouraging

310
00:19:25,200 --> 00:19:27,520
Speaker 1: them to move to dollars And so, okay, we're going

311
00:19:27,560 --> 00:19:31,879
Speaker 1: to The basic idea is we're going to pay you.

312
00:19:31,600 --> 00:19:33,960
Speaker 1: You keep your money in lira in uh for a

313
00:19:34,000 --> 00:19:36,360
Speaker 1: certain amount of time, and if the lera weakens during

314
00:19:36,400 --> 00:19:39,440
Speaker 1: that will compensate you by giving giving you more lira.

315
00:19:39,560 --> 00:19:44,320
Speaker 1: What is your sort of initial read on these types

316
00:19:44,359 --> 00:19:48,840
Speaker 1: of programs or this program in particular, It looks kind

317
00:19:48,840 --> 00:19:51,320
Speaker 1: of incoherent. I mean, there's there's an attempt to change

318
00:19:51,320 --> 00:19:55,040
Speaker 1: people's expectations, you know, and thus creates a kind of

319
00:19:55,080 --> 00:19:58,200
Speaker 1: a virtuous circle that people will move their money out

320
00:19:58,200 --> 00:20:02,320
Speaker 1: of dollars into lira, stabilize the banking system and it

321
00:20:02,400 --> 00:20:05,760
Speaker 1: all work fine, you know, and if you could just

322
00:20:05,800 --> 00:20:09,720
Speaker 1: somehow spontaneously make people start shifting their money out of

323
00:20:09,760 --> 00:20:13,400
Speaker 1: dollars into lera, creating a bit for lira, stabilize the currency,

324
00:20:13,520 --> 00:20:17,119
Speaker 1: bring inflation down. You could see how how this would work.

325
00:20:17,880 --> 00:20:21,120
Speaker 1: The trouble is that this is and I think your

326
00:20:21,240 --> 00:20:23,800
Speaker 1: previous interview he made the same point that this is

327
00:20:23,800 --> 00:20:28,800
Speaker 1: the government writing effectively put options on the lira. Now,

328
00:20:28,840 --> 00:20:31,359
Speaker 1: if you write and at the money put option on

329
00:20:31,400 --> 00:20:34,200
Speaker 1: the lira right now, it's going to cost you about

330
00:20:34,200 --> 00:20:39,000
Speaker 1: eleven of the sun ensured. Even if kind of leera

331
00:20:39,119 --> 00:20:42,639
Speaker 1: volatility or implied volatility goes down to the lowest levels

332
00:20:42,680 --> 00:20:45,080
Speaker 1: it's been for the last couple of years, it's still

333
00:20:45,119 --> 00:20:48,359
Speaker 1: going to cost you somewhere close to five of the amount.

334
00:20:48,400 --> 00:20:51,520
Speaker 1: So this is the government writing a very very valuable

335
00:20:51,840 --> 00:20:56,080
Speaker 1: put option for free. And that's you know, we saw something.

336
00:20:56,160 --> 00:20:59,560
Speaker 1: I mean the counter argument and I wouldn't you know,

337
00:20:59,840 --> 00:21:03,600
Speaker 1: I not making an exact comparison, but the logic is

338
00:21:03,680 --> 00:21:08,040
Speaker 1: quite similar to for example, the Irish government deciding to

339
00:21:08,160 --> 00:21:11,960
Speaker 1: guarantee its banks in two thousand and eight on the

340
00:21:12,000 --> 00:21:15,439
Speaker 1: basis that if people believe the government stands behind the banks,

341
00:21:15,640 --> 00:21:18,080
Speaker 1: they won't pull their money out of the banks you know,

342
00:21:18,160 --> 00:21:20,480
Speaker 1: and there and therefore the banks won't need protecting, and

343
00:21:20,320 --> 00:21:24,640
Speaker 1: it's effectively a free option, a free bit of underwriter.

344
00:21:25,200 --> 00:21:27,720
Speaker 1: I mean, what happened in Ireland is of course that

345
00:21:27,760 --> 00:21:30,560
Speaker 1: the banks were insolved, were basically unsafe at any speed.

346
00:21:30,720 --> 00:21:32,639
Speaker 1: You know that that no matter who you know, and

347
00:21:32,680 --> 00:21:36,560
Speaker 1: that the Irish government clearly couldn't really afford to underwrite

348
00:21:36,840 --> 00:21:39,240
Speaker 1: the banking sector as it was, so all you really

349
00:21:39,280 --> 00:21:43,160
Speaker 1: got was effectively a free lunch for the existing debtors

350
00:21:43,200 --> 00:21:47,240
Speaker 1: of Anglo Irish Bank, who got you fully repaid from

351
00:21:47,240 --> 00:21:51,480
Speaker 1: a bank that was very subsequently, very very very clearly insolvent.

352
00:21:51,880 --> 00:21:54,280
Speaker 1: And so the worry is this that this is this

353
00:21:54,400 --> 00:21:57,879
Speaker 1: is an option that the Turkish back, And if you

354
00:21:57,880 --> 00:21:59,840
Speaker 1: look at it like this, I mean, the logic would

355
00:21:59,840 --> 00:22:04,400
Speaker 1: be that around half the Turkish deposit base right now

356
00:22:05,119 --> 00:22:07,480
Speaker 1: is in dollars, it comes out with something like a

357
00:22:07,560 --> 00:22:12,040
Speaker 1: hundred and fifty billion dollars. The Liara moved Fiort of

358
00:22:12,080 --> 00:22:14,960
Speaker 1: Piake to trot or not even picked to trot, moving

359
00:22:15,000 --> 00:22:19,360
Speaker 1: about a month. You know, there's no way the Turkish

360
00:22:19,400 --> 00:22:24,880
Speaker 1: government can afford to pay for moves of that magnitude.

361
00:22:25,400 --> 00:22:27,960
Speaker 1: I mean, the idea of making a guarantee and therefore

362
00:22:28,000 --> 00:22:30,439
Speaker 1: it never happens to be never has to be used,

363
00:22:30,880 --> 00:22:34,320
Speaker 1: is obviously quite attractive, but you have to have some

364
00:22:34,359 --> 00:22:36,560
Speaker 1: sort of logic that if the guarantee does have to

365
00:22:36,560 --> 00:22:40,520
Speaker 1: be used, it's it's not going to make everybody's credit

366
00:22:40,560 --> 00:22:44,560
Speaker 1: worth and then you just have the bank's contaminating what

367
00:22:44,720 --> 00:22:49,640
Speaker 1: is still a pretty much a pretty clean government balance sheet. Yeah.

368
00:22:49,640 --> 00:22:52,600
Speaker 1: I mean, this seems to be the key point because

369
00:22:52,640 --> 00:22:57,320
Speaker 1: we have seen over the years various governments or central

370
00:22:57,359 --> 00:23:01,960
Speaker 1: banks essentially make a play I could promise, and many

371
00:23:02,040 --> 00:23:05,720
Speaker 1: and the successful ones never actually end up being used.

372
00:23:05,760 --> 00:23:08,159
Speaker 1: And the one that you mentioned Irish government, but the

373
00:23:08,160 --> 00:23:11,200
Speaker 1: one that really stands out to my mind it was

374
00:23:11,280 --> 00:23:16,120
Speaker 1: highly effective was Mario drags o MT when they said,

375
00:23:16,160 --> 00:23:19,399
Speaker 1: you know, if a country gets into financial trouble and

376
00:23:19,440 --> 00:23:23,320
Speaker 1: if it's willing to undergo a program of restructuring, then

377
00:23:23,400 --> 00:23:26,159
Speaker 1: the the e c B will backstop it's debt, and

378
00:23:26,200 --> 00:23:30,639
Speaker 1: that closed spreads extremely fast, and no country had to

379
00:23:31,000 --> 00:23:34,320
Speaker 1: No country ever entered into a program, and the O

380
00:23:34,520 --> 00:23:37,600
Speaker 1: m T was never used, but regardless there's an extremely

381
00:23:37,720 --> 00:23:42,719
Speaker 1: successful program. We saw it similarly here in March with

382
00:23:42,840 --> 00:23:47,760
Speaker 1: the Fed promising to back municipal bonds for cities and

383
00:23:47,840 --> 00:23:50,760
Speaker 1: states that got into trouble in the end, that basically

384
00:23:50,800 --> 00:23:53,919
Speaker 1: did the trick. I think a couple localities ended up

385
00:23:54,000 --> 00:23:58,160
Speaker 1: using it, but by and large the mechanism wasn't used much.

386
00:23:58,560 --> 00:24:02,399
Speaker 1: You know, obviously the East EB and the FED, you

387
00:24:02,440 --> 00:24:04,960
Speaker 1: can't beat them though they have essentially you know, they're

388
00:24:04,960 --> 00:24:07,960
Speaker 1: free floated their their own currencies. Yeah, I mean you

389
00:24:07,720 --> 00:24:10,840
Speaker 1: you can't beat the FED in dollars, you can't beat

390
00:24:10,840 --> 00:24:14,399
Speaker 1: the ECB in euros. But I mean what the Turks

391
00:24:14,400 --> 00:24:16,359
Speaker 1: are saying is that you know, their effects of the

392
00:24:16,440 --> 00:24:18,480
Speaker 1: underwriting a dollar debt. I mean whether or not they

393
00:24:18,560 --> 00:24:21,399
Speaker 1: say they're paying it in lira doesn't really matter. It

394
00:24:21,440 --> 00:24:24,000
Speaker 1: means that they're underwriting a dollar debt and the Central

395
00:24:24,000 --> 00:24:28,159
Speaker 1: Bank of Turkey cannot print dollars, right, so in theory

396
00:24:28,400 --> 00:24:32,920
Speaker 1: they're only guaranteeing you lira, So technically they're not they're

397
00:24:32,920 --> 00:24:36,639
Speaker 1: not guaranteeing you dollars. But if they're guaranteeing a level

398
00:24:36,720 --> 00:24:40,159
Speaker 1: of lira dollar stability, which I think is how you

399
00:24:40,800 --> 00:24:44,840
Speaker 1: then de facto they're trying to they're promising to give

400
00:24:44,880 --> 00:24:48,679
Speaker 1: you some sort of they're implicitly offering to sort of

401
00:24:48,680 --> 00:24:51,520
Speaker 1: pay dollars, it seems like, and that is something that

402
00:24:51,560 --> 00:24:56,080
Speaker 1: the government, neither the government nor the central bank can do. Yeah,

403
00:24:56,119 --> 00:24:58,199
Speaker 1: I mean, one of the reasons you want to hold

404
00:24:58,520 --> 00:25:01,399
Speaker 1: you're you're willing to hold areas that you can freely

405
00:25:01,440 --> 00:25:04,400
Speaker 1: convert it into dollars at any time. If we get

406
00:25:04,560 --> 00:25:06,840
Speaker 1: it to the point where you have a dollar liras

407
00:25:06,920 --> 00:25:10,600
Speaker 1: spiral that is threatening, you know that that is moving

408
00:25:10,600 --> 00:25:13,080
Speaker 1: the way it was in December. The last thing you

409
00:25:13,119 --> 00:25:16,280
Speaker 1: want to be doing is printing huge amounts of lira

410
00:25:16,640 --> 00:25:21,720
Speaker 1: and giving those two people who treasure dollar dollar lira stability,

411
00:25:21,760 --> 00:25:23,720
Speaker 1: because then they'll just rush out and then when when

412
00:25:23,720 --> 00:25:26,639
Speaker 1: the time comes, they'll buy dollars and make the spiral worse.

413
00:25:27,119 --> 00:25:31,240
Speaker 1: It seems like to me that the nightmare scenario would

414
00:25:31,280 --> 00:25:35,159
Speaker 1: be that you get significant take up of the new accounts,

415
00:25:35,800 --> 00:25:40,200
Speaker 1: but not significant enough such that it actually puts the

416
00:25:40,240 --> 00:25:42,520
Speaker 1: floor into the lyra. So in theory of everyone were

417
00:25:42,600 --> 00:25:46,200
Speaker 1: to put their lera into these licked accounts, it seems

418
00:25:46,240 --> 00:25:49,280
Speaker 1: to me that that could have a stabilizing effect. But

419
00:25:49,359 --> 00:25:51,800
Speaker 1: it's also is if you put have a lot of

420
00:25:51,840 --> 00:25:55,360
Speaker 1: people putting their money in these accounts, but not enough,

421
00:25:55,600 --> 00:25:59,480
Speaker 1: you could still have significant liar weakness, and the payout

422
00:25:59,600 --> 00:26:03,120
Speaker 1: gets triggered such that the government is then forced to

423
00:26:03,160 --> 00:26:07,399
Speaker 1: print more lira, accelerating the downward spiral. Yeah, I mean

424
00:26:07,440 --> 00:26:10,360
Speaker 1: the argument is if you compare it to an insurance contract,

425
00:26:10,400 --> 00:26:13,040
Speaker 1: I mean, the way the conventional insurance is, you know,

426
00:26:13,119 --> 00:26:16,199
Speaker 1: you insure your car. If somebody sets fire to your car,

427
00:26:16,560 --> 00:26:19,440
Speaker 1: we'll we'll give you the money. But what these guys

428
00:26:19,480 --> 00:26:23,399
Speaker 1: are saying, or what the Turkish authorities are effectively saying, is,

429
00:26:23,800 --> 00:26:26,440
Speaker 1: you know, if we ensure your car, we will make

430
00:26:26,480 --> 00:26:29,639
Speaker 1: it much less likely that your car catches fire. But

431
00:26:29,720 --> 00:26:31,920
Speaker 1: if your car catches fire, then we'll set fire to

432
00:26:31,960 --> 00:26:35,240
Speaker 1: your house as well. Is that the consequences of a

433
00:26:35,240 --> 00:26:39,760
Speaker 1: big dollar lira spiral become worse through the existence of

434
00:26:39,880 --> 00:26:43,639
Speaker 1: these insurance contracts, as these financial products, they might make

435
00:26:43,680 --> 00:26:47,200
Speaker 1: a crisis less likely, but if a crisis does happen,

436
00:26:47,880 --> 00:26:51,080
Speaker 1: it's um it's going to be much worse because the

437
00:26:51,119 --> 00:26:54,679
Speaker 1: sovereign balance sheet is contaminated as well, and you're printing

438
00:26:54,760 --> 00:27:14,800
Speaker 1: leer at the very worst time to be printing more lera. Well,

439
00:27:14,840 --> 00:27:18,159
Speaker 1: what are you watching for in the weeks ahead to

440
00:27:18,600 --> 00:27:22,600
Speaker 1: see if some sense of stability is going to be achieved,

441
00:27:23,320 --> 00:27:27,560
Speaker 1: or if you know, we'll see a further downward spiral. Well,

442
00:27:27,600 --> 00:27:30,200
Speaker 1: I mean two things. One that is just what happens

443
00:27:30,240 --> 00:27:33,399
Speaker 1: to Liarra by itself, because obviously we saw this massive

444
00:27:33,920 --> 00:27:37,000
Speaker 1: I think something like a thirty percent into a day move.

445
00:27:37,600 --> 00:27:40,880
Speaker 1: Now the interesting thing, or the relevant thing to us

446
00:27:40,960 --> 00:27:43,399
Speaker 1: is at the time people are saying, well, everybody's clearly

447
00:27:43,400 --> 00:27:46,320
Speaker 1: buying into this idea, it's going to work. But it's

448
00:27:46,400 --> 00:27:48,640
Speaker 1: you know, it's subsequently turned out that there was very

449
00:27:48,760 --> 00:27:52,280
Speaker 1: very heavy intervention by the turkeysh Central Bank even while

450
00:27:52,280 --> 00:27:55,800
Speaker 1: the speech was taking place, and presumably timed in order

451
00:27:55,840 --> 00:27:59,680
Speaker 1: to coincide. I mean, I mean, I've seen various estimates,

452
00:27:59,680 --> 00:28:01,680
Speaker 1: but most to them you know, on the day alone,

453
00:28:02,000 --> 00:28:05,239
Speaker 1: and this is after markets, local markets had shut. It's

454
00:28:05,280 --> 00:28:08,920
Speaker 1: about six pm London, so kind of eight nine local time.

455
00:28:09,359 --> 00:28:12,760
Speaker 1: That that the central bank kind of put somewhere between

456
00:28:12,800 --> 00:28:16,200
Speaker 1: four and five billion dollars in sort of to buy

457
00:28:16,280 --> 00:28:20,120
Speaker 1: up lira, and that thus ramping the lira very very much.

458
00:28:20,240 --> 00:28:22,919
Speaker 1: And it would be interesting to see, you know, just

459
00:28:23,440 --> 00:28:30,280
Speaker 1: can the lira sustain these improved valuations even without But

460
00:28:30,320 --> 00:28:33,639
Speaker 1: the other thing that we think is probably more of

461
00:28:33,640 --> 00:28:36,680
Speaker 1: a medium term variable and will drive other things is

462
00:28:36,720 --> 00:28:39,520
Speaker 1: domestic credit growth, because the real you know, it's it's

463
00:28:39,520 --> 00:28:41,800
Speaker 1: not just a question of what's the level of interest rates,

464
00:28:42,120 --> 00:28:46,080
Speaker 1: it's also the quantity of new credit. And Turkey's problems,

465
00:28:46,120 --> 00:28:50,520
Speaker 1: certainly since the global financial crisis, have always coincided with

466
00:28:50,600 --> 00:28:54,080
Speaker 1: a growth in domestic lending. But it doesn't really matter

467
00:28:54,080 --> 00:28:57,680
Speaker 1: if it's learas or dollars. Is that lending picks up,

468
00:28:57,760 --> 00:29:02,200
Speaker 1: activity picks up, that creates demand for imports, It also

469
00:29:02,640 --> 00:29:07,360
Speaker 1: creates leakage into dollars, and it tends to weaken the currency.

470
00:29:07,480 --> 00:29:09,640
Speaker 1: So what we need to see, I think above all

471
00:29:09,840 --> 00:29:13,480
Speaker 1: is monetary discipline, not some not just in terms of

472
00:29:13,520 --> 00:29:16,400
Speaker 1: the actual level of interest rates, both the policy rate

473
00:29:16,480 --> 00:29:20,280
Speaker 1: and effective rates. It's it's very hard to see how

474
00:29:20,320 --> 00:29:24,400
Speaker 1: a level of credit growth compatible with strong domestic demand

475
00:29:24,440 --> 00:29:28,840
Speaker 1: growth is also compatible with leris stability. I mean, how

476
00:29:28,920 --> 00:29:31,600
Speaker 1: much of you know, we're still in the middle of

477
00:29:31,600 --> 00:29:35,560
Speaker 1: a pandemic globally, and obviously even in the US. You know,

478
00:29:35,600 --> 00:29:40,000
Speaker 1: there's inflation is elevated right now, and there is a

479
00:29:40,040 --> 00:29:44,160
Speaker 1: hope that when things normalize, whatever that means, that you know,

480
00:29:44,200 --> 00:29:49,760
Speaker 1: inflation will moderate. How much of the stress on Turkey's

481
00:29:49,800 --> 00:29:55,240
Speaker 1: economy is in part a extreme version of what many

482
00:29:55,240 --> 00:30:00,479
Speaker 1: places are seeing and in theory should moderate somewhat just

483
00:30:00,560 --> 00:30:04,280
Speaker 1: if you know, the health situation and the global travel

484
00:30:04,320 --> 00:30:07,280
Speaker 1: situation and the business situation, or to begin to normalize.

485
00:30:08,600 --> 00:30:12,760
Speaker 1: I mean, specifically for Turkey, a Karma coronavirus situation is

486
00:30:12,840 --> 00:30:17,120
Speaker 1: terribly important because a tourists season is incredibly important to

487
00:30:17,160 --> 00:30:20,760
Speaker 1: their bands of payments. So you know, if if this

488
00:30:20,800 --> 00:30:25,000
Speaker 1: summer looks like one or better, that's very positive for Turkey.

489
00:30:25,040 --> 00:30:28,960
Speaker 1: If it looks like then, you know, then really that's

490
00:30:29,040 --> 00:30:32,200
Speaker 1: seriously problematic for Turkey. I mean in terms of the

491
00:30:32,200 --> 00:30:35,920
Speaker 1: global forces, you know, I mean, Turkey is unusual in

492
00:30:36,040 --> 00:30:39,800
Speaker 1: terms of relying on external energy for for essentially all

493
00:30:39,880 --> 00:30:43,680
Speaker 1: its energy needs so very high, that very high oil price,

494
00:30:43,720 --> 00:30:47,200
Speaker 1: the very high gas prices, that those are a big negative.

495
00:30:47,480 --> 00:30:50,200
Speaker 1: But I think you know Turkeys, you know, inflation in

496
00:30:50,240 --> 00:30:53,840
Speaker 1: the mid thirties is a point where they can't just

497
00:30:53,920 --> 00:30:56,880
Speaker 1: rely on external factors to to bail them out. They

498
00:30:56,920 --> 00:31:00,840
Speaker 1: need to get the policy mix more light than it's

499
00:31:00,880 --> 00:31:04,800
Speaker 1: been so far. Opinions very I know that your previous

500
00:31:04,800 --> 00:31:09,240
Speaker 1: interviewee was much more positive on the on the new

501
00:31:09,280 --> 00:31:12,120
Speaker 1: savings plan than I am, but it's going to require

502
00:31:12,160 --> 00:31:17,240
Speaker 1: policymaker in action. Even in the most benevolent scenario, if

503
00:31:17,280 --> 00:31:19,800
Speaker 1: they keep doing what they're doing, they will be able

504
00:31:19,800 --> 00:31:24,520
Speaker 1: to have a crisis. So at some point, you know,

505
00:31:24,680 --> 00:31:30,440
Speaker 1: in theory, a currency weekend significantly that crushes imports. I

506
00:31:30,480 --> 00:31:35,160
Speaker 1: guess it makes exports more competitive, Tourism, maybe a few other,

507
00:31:35,680 --> 00:31:41,280
Speaker 1: a few other industries. How do things stabilize? And you know, obviously, look,

508
00:31:41,360 --> 00:31:44,480
Speaker 1: we can we can talk about how rough things are

509
00:31:44,600 --> 00:31:47,240
Speaker 1: and the problems the policy, but at some point, whether

510
00:31:47,240 --> 00:31:50,080
Speaker 1: we're talking about the currency or whether we're talking about

511
00:31:50,520 --> 00:31:53,360
Speaker 1: real assets in the economy, you know, something becomes a

512
00:31:53,440 --> 00:31:55,960
Speaker 1: buy and you don't. If you wait for good things

513
00:31:55,960 --> 00:31:58,680
Speaker 1: to emerge, perhaps it's too late. What do you look

514
00:31:58,720 --> 00:32:01,520
Speaker 1: for and not just turn in specifically, but you know,

515
00:32:01,560 --> 00:32:05,320
Speaker 1: in other sort of like ems that really like hit

516
00:32:05,400 --> 00:32:08,520
Speaker 1: rough times, what do you look forward to see inflection

517
00:32:08,600 --> 00:32:11,080
Speaker 1: points in when it's like, yes, it's still really bad,

518
00:32:11,520 --> 00:32:15,240
Speaker 1: but it's all priced in whatever that means. Yeah, I

519
00:32:15,280 --> 00:32:18,760
Speaker 1: mean inflection inflection points tend to be much more about

520
00:32:18,840 --> 00:32:22,240
Speaker 1: what's going on than valuations. I mean that there is

521
00:32:22,280 --> 00:32:26,640
Speaker 1: no absolute level for a dollar owed by Turkey. You know,

522
00:32:26,680 --> 00:32:28,880
Speaker 1: I mean, at the moment the external debt is trading

523
00:32:29,160 --> 00:32:32,200
Speaker 1: close enough to par that makes no difference. But you

524
00:32:32,240 --> 00:32:36,960
Speaker 1: know it's not. There's no feeling that you know, a

525
00:32:37,000 --> 00:32:40,800
Speaker 1: dollar debt price of thirty cents and the dollar a

526
00:32:40,800 --> 00:32:44,680
Speaker 1: Turkish lira rate that's fort below long term trend. There's

527
00:32:44,680 --> 00:32:47,959
Speaker 1: no absolute level of valuation that on its own constitute

528
00:32:47,960 --> 00:32:50,400
Speaker 1: to buy. And you can see this, for example in

529
00:32:50,440 --> 00:32:54,000
Speaker 1: the in the really extreme cases, places like Lebanon or

530
00:32:54,080 --> 00:32:57,560
Speaker 1: Venezuela or Argentina. And I absolutely am not saying that

531
00:32:57,600 --> 00:33:00,360
Speaker 1: Turkeys in the same class as those countries. But you

532
00:33:00,440 --> 00:33:05,320
Speaker 1: can't rely on valuation alone to make the case to buy,

533
00:33:05,680 --> 00:33:07,960
Speaker 1: you do. We do need to find a situation where

534
00:33:07,960 --> 00:33:13,480
Speaker 1: we think that the Turkish situation is sustainable. That could

535
00:33:13,480 --> 00:33:16,960
Speaker 1: be any you know, it could be one that I'm wrong,

536
00:33:17,080 --> 00:33:21,479
Speaker 1: that inflation peaks, starts to drift down, that you know

537
00:33:21,560 --> 00:33:24,520
Speaker 1: that the president Hurdahan can do a victory lap and

538
00:33:24,720 --> 00:33:27,000
Speaker 1: while I'm looking for a new job. You know, it

539
00:33:27,040 --> 00:33:29,840
Speaker 1: can be just that things start getting better by themselves.

540
00:33:30,320 --> 00:33:32,400
Speaker 1: It could be at the other extreme that they have

541
00:33:32,520 --> 00:33:37,920
Speaker 1: to close the banks or ration depositors, or convert dollar

542
00:33:38,320 --> 00:33:40,960
Speaker 1: dollar deposits into Lira, none of which I'm saying is

543
00:33:40,960 --> 00:33:44,680
Speaker 1: particularly likely. I'm just kind of presenting very very extreme

544
00:33:44,760 --> 00:33:47,959
Speaker 1: cases of what could happen. I don't think, you know,

545
00:33:48,480 --> 00:33:51,000
Speaker 1: this sort of crash scenario is likely at all. But

546
00:33:51,320 --> 00:33:54,440
Speaker 1: what we do need to see is something like the

547
00:33:54,520 --> 00:33:59,040
Speaker 1: lira stabilizing and at the moment, you know, with with

548
00:33:59,040 --> 00:34:02,040
Speaker 1: with still half the deposit base in Lira. As long

549
00:34:02,080 --> 00:34:05,560
Speaker 1: as the Lira is this volatile, I don't think volatility

550
00:34:05,560 --> 00:34:09,439
Speaker 1: will continue to be self sustaining. It's not about valuations.

551
00:34:09,480 --> 00:34:12,080
Speaker 1: You need some way or other to get to a

552
00:34:12,160 --> 00:34:16,360
Speaker 1: level where where the country moves to a sustainable footing,

553
00:34:16,400 --> 00:34:20,399
Speaker 1: where inflation stops rising, the currency stabilizers and so on.

554
00:34:21,080 --> 00:34:23,279
Speaker 1: Let's say, you know, before we go and this I

555
00:34:23,320 --> 00:34:25,480
Speaker 1: found this to be very helpful, But before we go,

556
00:34:25,680 --> 00:34:29,839
Speaker 1: you know, mentioned the ongoing pandemic. What is your sort

557
00:34:29,880 --> 00:34:33,480
Speaker 1: of broader view going. You know, as we look to two,

558
00:34:34,080 --> 00:34:37,640
Speaker 1: one of the stories for years has really been currency.

559
00:34:37,800 --> 00:34:39,960
Speaker 1: You know, we had the dollar was extremely strong, in

560
00:34:40,880 --> 00:34:44,160
Speaker 1: surprising a lot of people, especially as more rad hikes

561
00:34:44,200 --> 00:34:48,200
Speaker 1: began to get priced in. For two, US risk assets

562
00:34:48,600 --> 00:34:52,160
Speaker 1: once again continue to outperform the world. What is your

563
00:34:52,200 --> 00:34:54,880
Speaker 1: sort of like broader things you're looking at in the

564
00:34:54,920 --> 00:34:59,120
Speaker 1: in the in the e M landscape, maybe beyond Turkey. Yeah,

565
00:34:58,920 --> 00:35:01,000
Speaker 1: I mean it's the is going to sound like a

566
00:35:01,120 --> 00:35:04,920
Speaker 1: terribly predictable answer, but you know, as long as the

567
00:35:04,920 --> 00:35:08,760
Speaker 1: FED remains hawkish and you know, I think three hikes

568
00:35:08,840 --> 00:35:11,759
Speaker 1: this year, I mean, it might not be hawkish by

569
00:35:11,920 --> 00:35:15,080
Speaker 1: Vulcan standards, but you know, it's still seen as a

570
00:35:15,239 --> 00:35:18,080
Speaker 1: hawkish that's a difficult environment free M, and it's a

571
00:35:18,080 --> 00:35:22,880
Speaker 1: difficult environment for anybody who's only you know where a

572
00:35:22,920 --> 00:35:25,799
Speaker 1: stronger dollar is a problem. You know, the the the

573
00:35:25,880 --> 00:35:29,000
Speaker 1: ideal thing would be a big growth recovery outside the

574
00:35:29,080 --> 00:35:33,000
Speaker 1: US because when when when growth is very US centric

575
00:35:33,040 --> 00:35:37,320
Speaker 1: as it basically you know almost always is that tends

576
00:35:37,360 --> 00:35:39,520
Speaker 1: to be a strong dollar environment, and that tends to

577
00:35:39,560 --> 00:35:42,440
Speaker 1: be a difficult environment free M to to prosper in.

578
00:35:42,880 --> 00:35:45,759
Speaker 1: But I think you know, number one the FED and

579
00:35:45,840 --> 00:35:49,280
Speaker 1: number two growth even in the developed world, but outside

580
00:35:49,320 --> 00:35:53,040
Speaker 1: the US are what we're most focused on. Well, Paul,

581
00:35:53,200 --> 00:35:56,200
Speaker 1: it is always a pleasure to speak to you, and

582
00:35:56,680 --> 00:36:00,400
Speaker 1: this was extremely helpful context on Turkey, So thank you

583
00:36:00,440 --> 00:36:17,040
Speaker 1: for coming out on a lot. Thanks very well. Obviously,

584
00:36:17,160 --> 00:36:19,400
Speaker 1: Tracey is not here, so I can't go back and

585
00:36:19,440 --> 00:36:22,919
Speaker 1: forth with her, but we got to complete I don't

586
00:36:22,920 --> 00:36:26,160
Speaker 1: know if I would say competing, but certainly different takes

587
00:36:26,520 --> 00:36:29,400
Speaker 1: on the lira and what's going on in Turkey. The

588
00:36:29,440 --> 00:36:32,680
Speaker 1: first one was a little bit more optimistic about the

589
00:36:32,719 --> 00:36:37,800
Speaker 1: government ability to encourage domestic savers to hold their money

590
00:36:37,840 --> 00:36:41,360
Speaker 1: in lira, to essentially use that ability to write a

591
00:36:41,560 --> 00:36:46,640
Speaker 1: lira put option to uh discourage more dollarization. However, as

592
00:36:46,800 --> 00:36:50,560
Speaker 1: Paul noted, you know, the issue with the government writing

593
00:36:50,600 --> 00:36:54,279
Speaker 1: such an option in this case is that, unlike say

594
00:36:54,320 --> 00:36:56,520
Speaker 1: with the e c B or the FED, you know

595
00:36:56,560 --> 00:36:59,360
Speaker 1: they're not It's not strictly a matter of printing the

596
00:36:59,440 --> 00:37:02,400
Speaker 1: own current to see because the implicit promise is to

597
00:37:02,480 --> 00:37:05,640
Speaker 1: hold the lyric stable relative to the dollar, and so

598
00:37:05,760 --> 00:37:08,480
Speaker 1: it's a little trickier. But I would have found it

599
00:37:08,560 --> 00:37:11,400
Speaker 1: very useful. I don't have a side, obviously, I'm just

600
00:37:11,440 --> 00:37:13,919
Speaker 1: a journalist, but I found it very useful to get

601
00:37:14,040 --> 00:37:17,120
Speaker 1: multiple perspectives. And maybe we'll talk more Turkey, but I

602
00:37:17,160 --> 00:37:20,719
Speaker 1: found it uh useful to get multiple perspectives because, as

603
00:37:20,760 --> 00:37:25,000
Speaker 1: the cliche goes, that's what makes a market. So we'll

604
00:37:25,040 --> 00:37:28,160
Speaker 1: just leave it there and people can decide for themselves,

605
00:37:28,200 --> 00:37:31,600
Speaker 1: and we'll follow the currency and uh the lyra, and

606
00:37:31,640 --> 00:37:34,120
Speaker 1: we'll see what happens. Maybe we'll have more episodes, but uh,

607
00:37:34,520 --> 00:37:37,920
Speaker 1: this has been another episode of the Odd Lots Podcast.

608
00:37:38,040 --> 00:37:40,440
Speaker 1: I'm Joe Wisn't Thought. You can follow me on Twitter

609
00:37:40,520 --> 00:37:43,960
Speaker 1: at the stal Work. Follow my co host Tracy Alloway

610
00:37:44,080 --> 00:37:49,200
Speaker 1: at Tracy Alloway. Follow our guest Paul McNamara, e M Expert.

611
00:37:49,800 --> 00:37:54,359
Speaker 1: His handle is at M Underscore Paul McNamara. Follow our

612
00:37:54,480 --> 00:37:58,400
Speaker 1: producer Laura Carlson. She's at Laura M. Carlson. Followed the

613
00:37:58,400 --> 00:38:01,840
Speaker 1: Bloomberg head of podcast, French scal Levi at Francesco Today.

614
00:38:02,200 --> 00:38:05,080
Speaker 1: And check out all of our podcasts at Bloomberg under

615
00:38:05,120 --> 00:38:07,840
Speaker 1: the handle at podcasts. Thanks for listening,