WEBVTT - Paul Mcnamara on the Problem With Turkey, and the Attempt To Save the Lira 0:00:10.960 --> 0:00:15.640 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:15.840 --> 0:00:21.759 I'm Joe Wisenthal. Unfortunately my colleague Tracy Alloway is out today, 0:00:22.040 --> 0:00:24.680 so it will just be me. But I'm very excited, 0:00:24.840 --> 0:00:28.880 nonetheless about this episode because we're going to continue speaking 0:00:29.280 --> 0:00:33.279 about one of the more interesting and complicated, at least 0:00:33.280 --> 0:00:36.680 seems complicated stories developing right now in markets, and that 0:00:36.960 --> 0:00:42.120 is the situation in Turkey. And if you haven't already, 0:00:42.159 --> 0:00:45.080 a couple of weeks ago, we published an episode with 0:00:45.120 --> 0:00:49.080 the economist Fila Bingal based in a in a bank 0:00:49.280 --> 0:00:54.400 and in Istanbul, basically walking through some of the measures 0:00:54.400 --> 0:00:58.520 that the air Delan government has taken recently to stabilize 0:00:58.560 --> 0:01:01.400 the lira. And of course the lira had a pretty 0:01:01.560 --> 0:01:06.920 terrible one. It feels like, as we said on that episode, 0:01:06.920 --> 0:01:09.840 that every nine months, every year, every year and a half, 0:01:09.880 --> 0:01:12.800 there's a pretty big episode in Turkey where the currency 0:01:12.840 --> 0:01:20.320 plunges and the government engages in seemingly unorthodox monetary policy. Nonetheless, 0:01:20.640 --> 0:01:25.080 none of it seems to have worked. Inflation is extremely high, 0:01:25.200 --> 0:01:28.080 and so the argument is or the attempt by the 0:01:28.120 --> 0:01:33.160 government is to discourage domestic savers from moving their money 0:01:33.280 --> 0:01:36.480 into into dollars and to hold their money in lira. 0:01:37.040 --> 0:01:39.240 So far, you know, this has been a goal for 0:01:39.280 --> 0:01:43.800 a while. Turkey is a heavily dollarized economy by and large, 0:01:43.840 --> 0:01:47.600 though nothing has has worked. So I would encourage people 0:01:47.640 --> 0:01:51.160 to listen to that episode for a discussion of the mechanics. 0:01:51.200 --> 0:01:54.000 But of course anything new is bound to be very controversial, 0:01:54.080 --> 0:01:55.960 and there's a lot of views and a lot of 0:01:56.000 --> 0:02:01.520 skepticism about whether anything will improve with the new measures. Uh, 0:02:01.520 --> 0:02:04.280 And so we want to continue on the topic. And 0:02:04.320 --> 0:02:06.680 of course in the last episode we spoke to an 0:02:06.680 --> 0:02:10.200 economist at a Turkish bank, but this time we want 0:02:10.280 --> 0:02:13.000 to get the perspective that's a little bit more international 0:02:13.080 --> 0:02:17.640 from the international investing community. And I'm extremely excited about 0:02:18.480 --> 0:02:21.320 our guest. He's been on the podcast two or three 0:02:21.360 --> 0:02:25.119 times in the past, often helping us understand what's going 0:02:25.160 --> 0:02:28.600 on in the e M and I think we've even 0:02:28.680 --> 0:02:34.120 talked Turkey specifically before, maybe in eighteen or nine. Nonetheless, 0:02:34.840 --> 0:02:38.040 very excited to welcome back to the show Paul McNamara. 0:02:38.160 --> 0:02:43.280 He's an investment director at GAM, longtime specialist in emerging markets, 0:02:43.400 --> 0:02:47.320 and so we're going to dive right in. So Paul 0:02:47.480 --> 0:02:51.480 welcome back to odd lots, thanks very much. Before we 0:02:51.560 --> 0:02:57.240 even get to the current measures and the current mechanisms 0:02:57.280 --> 0:02:59.239 that the government has put in place to attempt to 0:02:59.240 --> 0:03:04.639 stabilize the lira, how would you characterize the long term 0:03:04.800 --> 0:03:07.840 issues facing the country? Why is it in your view 0:03:07.880 --> 0:03:11.760 that we seemingly come back to Turkey in particular, I 0:03:11.800 --> 0:03:14.280 don't know, every year or every year and a half 0:03:14.639 --> 0:03:18.919 during some episode of high inflation and extreme currency of volatility. 0:03:20.360 --> 0:03:23.440 It's it's something that tends to be particularly true of 0:03:23.560 --> 0:03:26.120 countries which have a habit of getting themselves into trouble. 0:03:26.680 --> 0:03:29.920 Turkey isn't remotely in as much trouble as Argentina, but 0:03:30.880 --> 0:03:33.840 the mindset there is the same. Is that if you 0:03:33.960 --> 0:03:39.680 know a country is prone to or more corrections in 0:03:39.680 --> 0:03:44.520 the currency, to overnight huge rises in infrastrates or big 0:03:44.640 --> 0:03:48.000 drops in bond prices, you tend to be to react 0:03:48.160 --> 0:03:51.800 much faster. And this goes as much for people with 0:03:51.840 --> 0:03:54.080 a bit of money in the bank, do they switch 0:03:54.400 --> 0:03:58.560 their money from lira's to dollars or back again, or 0:03:58.560 --> 0:04:01.080 take their money out of the bank. You know, when 0:04:01.120 --> 0:04:03.880 you get this much volatility, it kind of creates its 0:04:03.880 --> 0:04:07.640 own volatility because people feel the need to react much faster, 0:04:08.000 --> 0:04:10.880 and just that willingness to react more quickly kind of 0:04:10.960 --> 0:04:14.200 creates sort of enhances the volatility, So you get into 0:04:14.240 --> 0:04:19.160 this kind of volatility promoting spiral. Now, how much of 0:04:19.200 --> 0:04:23.120 this spiral would you say is a function of, say, 0:04:23.200 --> 0:04:26.599 domestic institutions, and of course people perceive the Air Douan 0:04:26.680 --> 0:04:30.760 government to be engaged in I would say, highly unorthodox 0:04:30.960 --> 0:04:36.120 views of how monetary policy works, lowering rates, blaming high 0:04:36.200 --> 0:04:38.520 rates for high inflation, et cetera. How much of this 0:04:38.640 --> 0:04:43.440 spiral is sort of the government disinclination towards more orthodox 0:04:43.480 --> 0:04:48.200 policies versus sort of more behavioral explanations on the part 0:04:48.320 --> 0:04:54.000 of Turkish savers and their disinclination to hold lira, Like, what, 0:04:54.000 --> 0:04:58.120 what is why in particular does Turkey seem to exhibit 0:04:58.200 --> 0:05:01.680 this this doom loop? I mean, I think I think 0:05:01.680 --> 0:05:04.520 it's really interesting because it's it's kind of unusual to 0:05:04.520 --> 0:05:08.000 have a crisis which is which is largely voluntary. It's 0:05:08.120 --> 0:05:09.919 it's not like you have to do some sort of 0:05:09.920 --> 0:05:12.599 thought experiment. You know that what would be the counter 0:05:12.640 --> 0:05:16.000 factual if Turkey at higher interest rates? Because we know 0:05:16.120 --> 0:05:21.200 that that before President Hrderhan sacked rag Ball, the previous 0:05:21.240 --> 0:05:24.239 head of the Central Bank. We had much higher interest rates, 0:05:24.520 --> 0:05:27.160 and we had a liraer that had been appreciating solidly 0:05:27.240 --> 0:05:30.440 for a couple of months. So in terms of the 0:05:30.920 --> 0:05:35.480 trigger for this this particular situation, it's entirely I think 0:05:35.520 --> 0:05:38.560 on the on the shoulders of the government that they 0:05:38.600 --> 0:05:42.240 decided that they were going to sort of play play games. 0:05:42.320 --> 0:05:44.039 I think it is maybe a little bit casual that 0:05:44.080 --> 0:05:47.799 they decided that, you know, that they could conduct a 0:05:47.839 --> 0:05:51.560 complete experiment in monetary policy. I mean, I think there 0:05:51.560 --> 0:05:56.200 are longer term reasons why Turkey has been particularly prone 0:05:56.720 --> 0:06:00.920 to this boom bus cycle. It's a country where the 0:06:00.960 --> 0:06:04.960 external deficit, you know, dips on a regular basis into 0:06:05.000 --> 0:06:09.920 into deficit, into very substantial deficit. It's got much much 0:06:09.960 --> 0:06:13.880 lower level of foreign exchange reserves than pretty much any 0:06:13.920 --> 0:06:17.040 of the other big e ms except maybe South Africa, 0:06:17.600 --> 0:06:20.960 you know, so it has fewer natural safeguards. I mean, 0:06:21.080 --> 0:06:25.520 I think the history of the volatility makes the consequences 0:06:25.839 --> 0:06:30.760 of policy experiments more serious. But you know, primarily the 0:06:30.880 --> 0:06:34.520 you know, the recent huge amount of volatility was a 0:06:34.560 --> 0:06:38.960 political choice by the government. So why is that like 0:06:39.279 --> 0:06:42.400 when we talk about these ems that flare up of 0:06:42.480 --> 0:06:45.920 the news from time to time in Turkey, South Africa, 0:06:46.200 --> 0:06:50.360 Brazil from time to time. What is it a structurally 0:06:50.400 --> 0:06:54.080 and you mentioned the lack of foreign exchange reserves and 0:06:54.279 --> 0:06:57.679 the sort of the thin cushion that the country has. 0:06:57.839 --> 0:07:01.520 Is there something structural about well, what is it that 0:07:01.600 --> 0:07:05.080 I guess about the way the Turkish economy is structured 0:07:05.160 --> 0:07:08.599 in terms of domestic industry and so forth, such that 0:07:08.800 --> 0:07:13.400 it maintains these vulnerabilities And in your view, does a 0:07:13.520 --> 0:07:19.640 policy exist there could reverse some of these factors. Yeah, 0:07:19.640 --> 0:07:23.400 I mean, I think the very substantial role for foreign currency, 0:07:23.400 --> 0:07:26.840 and especially the US dollar is definitely something that makes 0:07:26.880 --> 0:07:31.360 Turkey much more vulnerable. You know that depositors regularly switched 0:07:31.400 --> 0:07:35.160 their money between lira and dollars depending on, you know, 0:07:35.520 --> 0:07:37.520 what they perceive the outlook for the currency to be. 0:07:37.880 --> 0:07:40.280 But probably more important is that an awful lot of 0:07:40.280 --> 0:07:43.280 the on shore debt is in US dollars. So not 0:07:43.360 --> 0:07:46.720 only do Turkish depositors keep a decent chunk of their 0:07:46.760 --> 0:07:49.800 savings in well, I'll keep saying dollars. I mean it 0:07:49.840 --> 0:07:53.720 does include especially euros. There's a few other currencies, but 0:07:53.760 --> 0:07:58.960 we'll say dollars for simplicity, is that not just genuine 0:07:59.000 --> 0:08:02.600 foreign debt, I mean debt owed to external institutions, but 0:08:02.680 --> 0:08:07.680 also on shore. The Turkish banks lend dollars to domestic borrowers. 0:08:07.920 --> 0:08:09.680 And if you owe, if you owe a lot of 0:08:09.720 --> 0:08:13.240 dollars and the liraa plunges, then you're going to end 0:08:13.320 --> 0:08:17.160 up chasing the lera. And that's especially true if if 0:08:17.200 --> 0:08:21.200 you're say running real estate or something like that, something 0:08:21.240 --> 0:08:23.520 without a natural stream of dollars. I mean, if you're 0:08:23.560 --> 0:08:25.680 a big exporter, then I think it makes a lot 0:08:25.680 --> 0:08:27.400 of sense your revenues are and dollars, It makes a 0:08:27.400 --> 0:08:29.560 lot of sense to have your debt in dollars. But 0:08:29.840 --> 0:08:32.560 in Turkey, you know, a big it's got a very 0:08:32.679 --> 0:08:37.760 very strong and well I mean not always vibrant real 0:08:37.880 --> 0:08:40.280 estate sector. You know, for a couple of years, I 0:08:40.280 --> 0:08:44.880 mean before COVID, the share of real estate construction was 0:08:44.960 --> 0:08:48.120 ticking up towards the level we saw before the euro 0:08:48.200 --> 0:08:52.000 crisis in places like Spain. And if you're borrowing dollars 0:08:52.240 --> 0:08:55.800 without a natural source of dollars, then then the very 0:08:55.800 --> 0:08:58.800 big role of the dollar in the economy is going 0:08:58.840 --> 0:09:02.800 to create volatility in itself, because it does mean that 0:09:02.840 --> 0:09:06.480 when the dollar strengthens, instead of making people look, oh, 0:09:06.559 --> 0:09:09.360 the dollar is expensive, I won't buy some now, it's 0:09:09.520 --> 0:09:12.680 I desperately need these dollars, and if it moves even more, 0:09:12.720 --> 0:09:15.160 I'm going to be even further underwater. So I think 0:09:15.160 --> 0:09:17.640 the big role of the dollar, not just on the 0:09:17.679 --> 0:09:19.880 deposit side, but also on the death side, is very 0:09:19.920 --> 0:09:23.480 important there. So this gets to you know, this sort 0:09:23.480 --> 0:09:26.640 of this gets to our discussion in our last episode 0:09:26.800 --> 0:09:31.359 in Turkey, which is people look at Turkey and they say, Okay, 0:09:31.520 --> 0:09:34.679 what's what's all this? You know, cutting interest rates where 0:09:34.679 --> 0:09:38.200 they should be hiking them, and diminishing the independence of 0:09:38.240 --> 0:09:40.600 the central bank, sacking the central bank, and so forth. 0:09:41.120 --> 0:09:44.040 But how much is the core issue really the high 0:09:44.240 --> 0:09:48.520 level of dollarization? And is there an argument that nothing 0:09:48.640 --> 0:09:52.320 can be solved or no stability can be achieved until 0:09:52.400 --> 0:09:56.640 that's reversed in some manner. It's fairly clear that you 0:09:56.679 --> 0:10:00.679 know that that the high level of dollarization creates more volatility. 0:10:00.720 --> 0:10:05.000 It makes any bad policy decision, any big external change, 0:10:05.040 --> 0:10:06.960 you know, be a spike in the oil price or 0:10:06.960 --> 0:10:09.920 something like that, it will generate more volatility in a 0:10:10.000 --> 0:10:13.760 highly dollarized economy like Turkey. But you know, I mean, 0:10:13.800 --> 0:10:17.120 dollarization is by no means unique to Turkey. You know 0:10:17.160 --> 0:10:20.080 that we've seen, I mean, most of the economies of 0:10:20.280 --> 0:10:23.760 Central Europe were to a significant degree, maybe not to 0:10:23.760 --> 0:10:26.920 the same degree as Turkey. You know, oriented to know, 0:10:26.960 --> 0:10:30.319 first the deutsch Mark and and later the Euro. You know, 0:10:30.360 --> 0:10:32.599 there was a huge role for foreign debt in the 0:10:33.120 --> 0:10:36.319 Asian financial crisis. Going back a bit further, a lot 0:10:36.360 --> 0:10:39.120 of Latin America still has a significant role of dollar 0:10:39.640 --> 0:10:43.800 for dollarization. But you know, an awful lot of countries 0:10:44.120 --> 0:10:47.400 across the emerging world have managed to reduce the level 0:10:47.400 --> 0:10:51.120 of dollarization in their economies. And that happens when they 0:10:51.200 --> 0:10:55.880 just managed to maintain macroeconomic stability. I mean, the one 0:10:55.880 --> 0:10:59.320 thing we haven't mentioned yet is inflation. But the current 0:11:00.000 --> 0:11:02.120 crash or whatever you want to call it, is primarily 0:11:02.120 --> 0:11:06.080 about inflation. I mean, nobody really cares that much. You 0:11:06.080 --> 0:11:08.880 know that there's no suggestion if you look globally that 0:11:09.000 --> 0:11:12.680 foreign investors demand a certain level of real of real 0:11:12.760 --> 0:11:16.800 interest rates generally to to put money into a foreign economy, 0:11:16.880 --> 0:11:20.160 or that you know, domestics will always prefer to have, 0:11:20.240 --> 0:11:22.600 you know, to hold foreign currency. If real interest rates 0:11:22.600 --> 0:11:25.160 get too low. But in the specific situation we have 0:11:25.280 --> 0:11:28.439 here where inflation is is well. I mean, even before 0:11:28.480 --> 0:11:33.079 the latest round of nightmarish numbers, inflation was already very high. 0:11:33.360 --> 0:11:37.840 And have this perception that any sort of orthodox policy 0:11:37.920 --> 0:11:41.280 or not even or even an unorthodox policy which had 0:11:41.320 --> 0:11:43.800 some kind of logic behind it, you know, that there 0:11:43.840 --> 0:11:47.600 was no possibility of anything like that. That's what's kind 0:11:47.600 --> 0:11:49.920 of creating its own kind of spiral because we saw 0:11:49.960 --> 0:11:52.240 the big drop in the lira, and the result of 0:11:52.280 --> 0:11:55.320 that is that the latest CPI that was announced was 0:11:55.360 --> 0:11:58.400 thirty six percent year on year, including thirteen and a 0:11:58.440 --> 0:12:01.160 half percent in one month, and the p p I 0:12:01.559 --> 0:12:07.080 is I mean, this is inflation ticking up from sort 0:12:07.120 --> 0:12:12.640 of nuisance and you know, minus disruptive factor to something 0:12:12.679 --> 0:12:16.360 that becomes a real problem that makes taking economic decisions, 0:12:16.840 --> 0:12:19.880 even with the horizon of a few months, really very difficult. 0:12:20.240 --> 0:12:23.160 The key problem is not, oh, you know, interest rate 0:12:23.240 --> 0:12:26.920 to here rather than there. It's that inflation is very 0:12:27.040 --> 0:12:30.320 very high and the government either doesn't have a clue 0:12:31.000 --> 0:12:49.960 or doesn't care un inflation specifically, I mean, how much 0:12:50.120 --> 0:12:53.480 is this is just I guess I would say the 0:12:53.520 --> 0:12:56.079 inverse of the lyric and so how much of it 0:12:56.200 --> 0:13:00.200 is passed through from import and so mechanistically when the 0:13:00.240 --> 0:13:04.600 lira weekends, inflation goes up, etcetera, or other other dynamics, 0:13:05.640 --> 0:13:07.440 there's a lot of there's a lot of other other 0:13:07.520 --> 0:13:10.480 stuff at work. I mean, you know, as a very 0:13:10.600 --> 0:13:14.199 very loose rule of thumb, the estimate of the past 0:13:14.280 --> 0:13:17.719 through you know, say, is very very roughly about a 0:13:17.800 --> 0:13:20.200 quarter or somewhere between a quarter and a fifth. So 0:13:20.240 --> 0:13:24.319 if you get a ten percent rise in inflation, sorry, 0:13:24.320 --> 0:13:26.720 ten percent drop in the lira, then that will probably 0:13:26.720 --> 0:13:28.920 add somewhere between two and two and a half percent 0:13:29.080 --> 0:13:33.760 to inflation. So it's part of it. But the factors 0:13:33.760 --> 0:13:36.360 which are at work everywhere else in the world, which is, 0:13:36.640 --> 0:13:40.600 you know, a huge build up of cash balances, both 0:13:40.640 --> 0:13:45.000 of firms and individual and household levels, people being pushed 0:13:45.000 --> 0:13:48.080 out of the economy and then suddenly kind of coming 0:13:48.120 --> 0:13:53.880 back bottlenecks, big rise in oil prices because all energy 0:13:54.240 --> 0:13:58.760 effectively all Turkey's energy needs are imported, which is which 0:13:58.800 --> 0:14:02.840 is quite unusual in e M. So the lira is 0:14:02.840 --> 0:14:06.000 a very important part of it. It's a particularly important 0:14:06.000 --> 0:14:10.880 part in the recent big spike, but it's overlaid on 0:14:11.200 --> 0:14:17.120 a general global reflationary picture, which I think may affect 0:14:17.679 --> 0:14:20.840 Turkey more than more than a lot of others as well. 0:14:21.200 --> 0:14:23.120 And of course you've got stuff like the government just 0:14:23.520 --> 0:14:27.800 pushed through a very very big rise in the minimum wage, 0:14:27.840 --> 0:14:30.920 for example. You know that that there's inflationary factors all 0:14:30.920 --> 0:14:35.080 over its assuming out for a second, and you mentioned 0:14:35.080 --> 0:14:38.960 that of course heavy dollarization is not unique to Turkeys, 0:14:38.920 --> 0:14:42.000 so it's a factor, but it can't explain everything. And 0:14:42.120 --> 0:14:45.920 you know that other e m s either have been 0:14:45.960 --> 0:14:48.800 able to deal with dollarization it hasn't created the same 0:14:48.880 --> 0:14:51.720 level of volatility, or they've actually been able to reduce 0:14:51.800 --> 0:14:56.920 dollarization over time. What's worked, Like, is there a playbook 0:14:57.240 --> 0:14:59.920 more broadly setting us at Turkey in what would work? 0:15:00.200 --> 0:15:02.720 Is there a consistent playbook that you've seen in your 0:15:02.760 --> 0:15:04.840 career watching a different ones where it's like, yes, this 0:15:04.960 --> 0:15:08.520 is a this has been a path towards reducing the 0:15:08.600 --> 0:15:11.960 delization and the risk that comes in there. Yeah, I 0:15:12.560 --> 0:15:17.080 mean it's extremely simple macro stability. I mean, obviously inflation 0:15:17.400 --> 0:15:19.720 coming down and staying down. I mean it looked as 0:15:19.720 --> 0:15:22.320 if Turkey was well on this course. I mean, actually 0:15:22.360 --> 0:15:24.040 the best part of a decade ago. Now, when they 0:15:24.120 --> 0:15:27.920 got inflation well down and persistently into single digits, then 0:15:28.200 --> 0:15:31.200 you start to see the currency stabilize, you see real appreciation. 0:15:32.160 --> 0:15:34.440 It's not just a question of inflation. You need to 0:15:34.480 --> 0:15:37.400 have the banking sector seen as safe. You need to 0:15:37.440 --> 0:15:42.000 see government debt seen as effectively risk free locally, but 0:15:42.080 --> 0:15:45.520 in a word, stability. If domestic institutions are stable, if 0:15:45.680 --> 0:15:49.240 if domestic macro variables are stable, then people don't want 0:15:49.280 --> 0:15:52.600 the uncertainty of owning a foreign currency, because then owning 0:15:52.600 --> 0:15:54.560 foreign currency becomes a two way risk. You get the 0:15:54.600 --> 0:15:59.360 domestic currency appreciating, and it's then it's the holders of 0:15:59.440 --> 0:16:02.480 foreign cur se who get hit very hard. I mean, 0:16:02.680 --> 0:16:05.000 a particularly good example is what happened in Poland and 0:16:05.080 --> 0:16:08.600 Hungary from the other side, when people who had taken 0:16:08.920 --> 0:16:12.400 mortgages in Swiss Frank's in particular, but in foreign currencies, 0:16:12.640 --> 0:16:16.840 the volatility between foreign currencies and local currencies makes both 0:16:17.160 --> 0:16:21.440 borrowers and lenders want to prefer domestic currency, not on 0:16:21.520 --> 0:16:25.760 the grounds of wanting a directional move that looks after them, 0:16:25.880 --> 0:16:28.120 but just on the grounds a certainty that you will 0:16:28.200 --> 0:16:31.200 not you know, even in somewhere like Poland or Hungary. 0:16:31.480 --> 0:16:34.520 You can comfortably get a move in euro's lotty or 0:16:34.560 --> 0:16:39.120 euro euro foreignt of five six seven percent, and people 0:16:39.120 --> 0:16:42.680 don't want that uncertainty. So I mean the natural preferences 0:16:42.720 --> 0:16:45.120 for people to use as their unit of account the 0:16:45.160 --> 0:16:50.200 domestic currency, and you need Turkish level disruption to chase 0:16:50.240 --> 0:16:54.520 people out of domestic currency. This gets into when people 0:16:54.680 --> 0:16:58.520 pinpoint are now or when they talk about the diminishing raw, 0:16:58.720 --> 0:17:02.600 the diminishing independent of central bank, or the frequent changing 0:17:02.640 --> 0:17:06.480 of key central bankers or ministerial points. This is where 0:17:06.560 --> 0:17:09.760 you would say it sounds like is a real negative 0:17:09.920 --> 0:17:15.600 contributing effect or essentially essentially the uncertainty effect. Yeah, I mean, 0:17:15.720 --> 0:17:18.840 I mean I think it's it's it's an attitude of 0:17:19.000 --> 0:17:20.960 the government, what kind of wants to have its cake 0:17:21.000 --> 0:17:24.400 and eat it that they want low inflation, but they 0:17:24.520 --> 0:17:27.480 you know, they also want high growth. They want financial 0:17:27.520 --> 0:17:31.000 conditions which are good for the good for it well, 0:17:31.119 --> 0:17:34.240 especially the property sector, but you know for rich people generally, 0:17:35.000 --> 0:17:38.800 you know, and and a reluctance to to recognize, you 0:17:38.800 --> 0:17:41.400 know that that there are tradeoffs. In economics, I mean 0:17:41.720 --> 0:17:45.160 specifically the idea that the best way to reduce inflation 0:17:45.240 --> 0:17:47.680 is to cut interest rates, you know, which has been 0:17:47.720 --> 0:17:53.280 repeated and actually loud amplified as we went through December. 0:17:53.880 --> 0:17:56.080 It just adds to the volatility. And you know, and 0:17:56.400 --> 0:17:59.960 it's the same thing that they've intervened very heavily. We've 0:18:00.000 --> 0:18:03.920 think that the intervention since the last couple of weeks 0:18:03.920 --> 0:18:08.200 of November was ticking up towards twenty billion dollars and 0:18:08.440 --> 0:18:11.520 you know, and and gross reserves are you know what 0:18:11.520 --> 0:18:15.760 about dred and thirty billion dollars? Never mind net that 0:18:15.800 --> 0:18:19.159 they've been running these big swap books with the domestic banks, 0:18:19.200 --> 0:18:23.480 which distort the usefulness for the figures that under the 0:18:23.480 --> 0:18:26.800 previous well a couple of finance ministers ago Mr al Bairack, 0:18:27.200 --> 0:18:31.040 the state banks were de facto intervening to keep the 0:18:31.119 --> 0:18:36.200 lira a stable. It's this incoherent mismatch of ideas based 0:18:36.240 --> 0:18:38.320 on the idea that things are only really going wrong 0:18:38.359 --> 0:18:42.119 from Turkey in Turkey because of foreigners, especially people like me, 0:18:42.560 --> 0:18:45.480 and not because they have a policy setup that is 0:18:45.560 --> 0:18:50.480 designed to produce inflation. So let's get to some of 0:18:50.520 --> 0:18:54.400 the more recent moods, and it seems like the core 0:18:54.440 --> 0:18:57.919 idea and again we discussed this recently is how do 0:18:58.200 --> 0:19:00.800 give people you know, obviously they're and you you laid 0:19:00.800 --> 0:19:03.560 it out in the beginning as well. There's this people 0:19:03.560 --> 0:19:06.760 are very quick to buy more dollars, and there is 0:19:06.800 --> 0:19:09.119 this sort of loop that happens the dollar strength and 0:19:09.119 --> 0:19:12.080 people want to buy more to get these very extreme moves, 0:19:12.280 --> 0:19:17.240 very rapid in dollar lira, and that of course destabilizing. 0:19:17.760 --> 0:19:20.840 So the idea for the government that the government is like, 0:19:20.920 --> 0:19:25.160 how do you give people protect lera protection without encouraging 0:19:25.200 --> 0:19:27.520 them to move to dollars And so, okay, we're going 0:19:27.560 --> 0:19:31.879 to The basic idea is we're going to pay you. 0:19:31.600 --> 0:19:33.960 You keep your money in lira in uh for a 0:19:34.000 --> 0:19:36.360 certain amount of time, and if the lera weakens during 0:19:36.400 --> 0:19:39.440 that will compensate you by giving giving you more lira. 0:19:39.560 --> 0:19:44.320 What is your sort of initial read on these types 0:19:44.359 --> 0:19:48.840 of programs or this program in particular, It looks kind 0:19:48.840 --> 0:19:51.320 of incoherent. I mean, there's there's an attempt to change 0:19:51.320 --> 0:19:55.040 people's expectations, you know, and thus creates a kind of 0:19:55.080 --> 0:19:58.200 a virtuous circle that people will move their money out 0:19:58.200 --> 0:20:02.320 of dollars into lira, stabilize the banking system and it 0:20:02.400 --> 0:20:05.760 all work fine, you know, and if you could just 0:20:05.800 --> 0:20:09.720 somehow spontaneously make people start shifting their money out of 0:20:09.760 --> 0:20:13.400 dollars into lera, creating a bit for lira, stabilize the currency, 0:20:13.520 --> 0:20:17.119 bring inflation down. You could see how how this would work. 0:20:17.880 --> 0:20:21.120 The trouble is that this is and I think your 0:20:21.240 --> 0:20:23.800 previous interview he made the same point that this is 0:20:23.800 --> 0:20:28.800 the government writing effectively put options on the lira. Now, 0:20:28.840 --> 0:20:31.359 if you write and at the money put option on 0:20:31.400 --> 0:20:34.200 the lira right now, it's going to cost you about 0:20:34.200 --> 0:20:39.000 eleven of the sun ensured. Even if kind of leera 0:20:39.119 --> 0:20:42.639 volatility or implied volatility goes down to the lowest levels 0:20:42.680 --> 0:20:45.080 it's been for the last couple of years, it's still 0:20:45.119 --> 0:20:48.359 going to cost you somewhere close to five of the amount. 0:20:48.400 --> 0:20:51.520 So this is the government writing a very very valuable 0:20:51.840 --> 0:20:56.080 put option for free. And that's you know, we saw something. 0:20:56.160 --> 0:20:59.560 I mean the counter argument and I wouldn't you know, 0:20:59.840 --> 0:21:03.600 I not making an exact comparison, but the logic is 0:21:03.680 --> 0:21:08.040 quite similar to for example, the Irish government deciding to 0:21:08.160 --> 0:21:11.960 guarantee its banks in two thousand and eight on the 0:21:12.000 --> 0:21:15.439 basis that if people believe the government stands behind the banks, 0:21:15.640 --> 0:21:18.080 they won't pull their money out of the banks you know, 0:21:18.160 --> 0:21:20.480 and there and therefore the banks won't need protecting, and 0:21:20.320 --> 0:21:24.640 it's effectively a free option, a free bit of underwriter. 0:21:25.200 --> 0:21:27.720 I mean, what happened in Ireland is of course that 0:21:27.760 --> 0:21:30.560 the banks were insolved, were basically unsafe at any speed. 0:21:30.720 --> 0:21:32.639 You know that that no matter who you know, and 0:21:32.680 --> 0:21:36.560 that the Irish government clearly couldn't really afford to underwrite 0:21:36.840 --> 0:21:39.240 the banking sector as it was, so all you really 0:21:39.280 --> 0:21:43.160 got was effectively a free lunch for the existing debtors 0:21:43.200 --> 0:21:47.240 of Anglo Irish Bank, who got you fully repaid from 0:21:47.240 --> 0:21:51.480 a bank that was very subsequently, very very very clearly insolvent. 0:21:51.880 --> 0:21:54.280 And so the worry is this that this is this 0:21:54.400 --> 0:21:57.879 is an option that the Turkish back, And if you 0:21:57.880 --> 0:21:59.840 look at it like this, I mean, the logic would 0:21:59.840 --> 0:22:04.400 be that around half the Turkish deposit base right now 0:22:05.119 --> 0:22:07.480 is in dollars, it comes out with something like a 0:22:07.560 --> 0:22:12.040 hundred and fifty billion dollars. The Liara moved Fiort of 0:22:12.080 --> 0:22:14.960 Piake to trot or not even picked to trot, moving 0:22:15.000 --> 0:22:19.360 about a month. You know, there's no way the Turkish 0:22:19.400 --> 0:22:24.880 government can afford to pay for moves of that magnitude. 0:22:25.400 --> 0:22:27.960 I mean, the idea of making a guarantee and therefore 0:22:28.000 --> 0:22:30.439 it never happens to be never has to be used, 0:22:30.880 --> 0:22:34.320 is obviously quite attractive, but you have to have some 0:22:34.359 --> 0:22:36.560 sort of logic that if the guarantee does have to 0:22:36.560 --> 0:22:40.520 be used, it's it's not going to make everybody's credit 0:22:40.560 --> 0:22:44.560 worth and then you just have the bank's contaminating what 0:22:44.720 --> 0:22:49.640 is still a pretty much a pretty clean government balance sheet. Yeah. 0:22:49.640 --> 0:22:52.600 I mean, this seems to be the key point because 0:22:52.640 --> 0:22:57.320 we have seen over the years various governments or central 0:22:57.359 --> 0:23:01.960 banks essentially make a play I could promise, and many 0:23:02.040 --> 0:23:05.720 and the successful ones never actually end up being used. 0:23:05.760 --> 0:23:08.159 And the one that you mentioned Irish government, but the 0:23:08.160 --> 0:23:11.200 one that really stands out to my mind it was 0:23:11.280 --> 0:23:16.120 highly effective was Mario drags o MT when they said, 0:23:16.160 --> 0:23:19.399 you know, if a country gets into financial trouble and 0:23:19.440 --> 0:23:23.320 if it's willing to undergo a program of restructuring, then 0:23:23.400 --> 0:23:26.159 the the e c B will backstop it's debt, and 0:23:26.200 --> 0:23:30.639 that closed spreads extremely fast, and no country had to 0:23:31.000 --> 0:23:34.320 No country ever entered into a program, and the O 0:23:34.520 --> 0:23:37.600 m T was never used, but regardless there's an extremely 0:23:37.720 --> 0:23:42.719 successful program. We saw it similarly here in March with 0:23:42.840 --> 0:23:47.760 the Fed promising to back municipal bonds for cities and 0:23:47.840 --> 0:23:50.760 states that got into trouble in the end, that basically 0:23:50.800 --> 0:23:53.919 did the trick. I think a couple localities ended up 0:23:54.000 --> 0:23:58.160 using it, but by and large the mechanism wasn't used much. 0:23:58.560 --> 0:24:02.399 You know, obviously the East EB and the FED, you 0:24:02.440 --> 0:24:04.960 can't beat them though they have essentially you know, they're 0:24:04.960 --> 0:24:07.960 free floated their their own currencies. Yeah, I mean you 0:24:07.720 --> 0:24:10.840 you can't beat the FED in dollars, you can't beat 0:24:10.840 --> 0:24:14.399 the ECB in euros. But I mean what the Turks 0:24:14.400 --> 0:24:16.359 are saying is that you know, their effects of the 0:24:16.440 --> 0:24:18.480 underwriting a dollar debt. I mean whether or not they 0:24:18.560 --> 0:24:21.399 say they're paying it in lira doesn't really matter. It 0:24:21.440 --> 0:24:24.000 means that they're underwriting a dollar debt and the Central 0:24:24.000 --> 0:24:28.159 Bank of Turkey cannot print dollars, right, so in theory 0:24:28.400 --> 0:24:32.920 they're only guaranteeing you lira, So technically they're not they're 0:24:32.920 --> 0:24:36.639 not guaranteeing you dollars. But if they're guaranteeing a level 0:24:36.720 --> 0:24:40.159 of lira dollar stability, which I think is how you 0:24:40.800 --> 0:24:44.840 then de facto they're trying to they're promising to give 0:24:44.880 --> 0:24:48.679 you some sort of they're implicitly offering to sort of 0:24:48.680 --> 0:24:51.520