Faced with a currency crisis (“Erdogan’s New Savings Plan Revives Pound Amid Backdoor Rate Hike Alleged,” report, December 22), Turkish authorities design new savings plan aimed at to stabilize the value of the pound.
Struck by persistent current account deficits, conflicts over the direction of monetary policy and political volatility, the authorities hope that the elimination of currency risk will encourage savers to hold more deposits in lira.
The mechanics of the scheme are simple: use public funds to compensate depositors based on the depreciation of the lira.
The year is not 2021, but 1975. Dubbed convertible lira deposit accounts, the scheme applied to foreign currency deposits and was popular with foreign financial institutions. By transferring the currency risk to the government, the program succeeded in stabilizing the lira in the short term.
Yet this stability was fleeting. By 1978 the risks and underlying costs of the scheme were evident and the accounts were phased out.
By bringing his central bank to heel, President Recep Tayyip Erdogan has blazed a dangerous path for his country. As currently conceived, the compensation costs of the Turkish Treasury will increase in proportion to the depreciation of the lira. If these offsetting costs cause the pound to depreciate further, which will happen if inflation problems remain acute, a positive feedback loop will set in and the costs of the scheme will quickly spiral out of control.
Dani Rodrik, a revered Harvard economist, once estimated that the convertible lira deposit account system cost more than 2% of Turkey’s gross national product and contributed to Turkey’s debt distress in the 1980s.
If Erdogan’s new program proves popular, its costs will be even higher.
Michael a gavin
Ottawa, Ontario, Canada