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Turkey gets desperate | Financial Times


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Good morning. I made a clanger of an error on Monday, noticed by many readers, but it did lead me to take a hard look at household balance sheets, as I lay out below. But first, a few words on Turkey, where markets are forcing the government into stranger and stranger policy choices. Email me: [email protected].

A stronger lira, for now

This, from Monday’s Financial Times, is scary:

The [Turkish lira] fell to a new record low of 18.36 against the dollar on Monday. It later rallied to 14.8 in chaotic trading late in the Turkish day after the president announced a scheme aimed at encouraging the country’s savers, who have increasingly kept their savings in dollars and gold, to hold their money in lira.

That is an absolutely huge, crazy swing. In just a few hours, the lira took back a month’s worth of rapid depreciation:

The scheme that appears to have set off this move in the currency seems to be a forward contract, to be offered to lira depositors, that will pay them lira compensation for any weakening against the dollar, after the impact of interest payments. Here is how Bloomberg described it:

The government will make up for losses incurred by holders of lira deposits should the lira’s declines against hard currencies exceed interest rates promised by banks, [president] Erdogan said after chairing a cabinet meeting in Ankara.

For one afternoon, at least, this intervention may have had the desired effect of stopping the wild rush for dollars (though one cannot be sure whether the government had not also encouraged the central bank or private banks to intervene in defense of the lira at the same time). 

That’s a good thing: a shortage of dollars caused by retail hoarding is a dangerous thing for the Turkish economy. Everything the country buys from the outside world, from energy to food, it buys in dollars. Turkish banks fund themselves in large part with international dollar debt. And the government has dollar bonds to pay.

But it is hard to see how this latest policy change will stop inflation. Instead it seems likely to make it worse, because it will introduce more lira liquidity into the system if the currency should weaken. And this comes on top of another highly inflationary policy intervention last week — a 50 per cent increase in the minimum wage.

The threat of a deepening inflationary spiral is causing some concern that the country might default on its debt. Again from the FT piece:

In a sign of growing concern over the fallout from the volatile currency on the health of the broader financial system, the cost of protecting against a default on Turkish debt has climbed sharply. The spread on the five-year credit default swap has risen to 612 basis points, from about 300bp at the start of the year.

What’s odd, though, given the collapse of the currency and the jejune policy tricks the government is instituting in response, it that the country’s hard currency bonds, while the are falling in value, are not completely bombed out. Indeed, they are not outside of their trading range of the past few years. Here the prices of two dollar-denominated Turkish bonds, due in 2025 and 2036:

Both bonds yield about 8 per cent. These are not the prices or yields of bonds in grave danger of default, even if the probability of default has risen as indicated by the CDS prices.

I talked to Unhedged’s go-to guy for emerging market currencies, Columbia Threadneedle rates strategist Edward Al-Hussainy, about what is going on. He argued that while the new policy is little more than a trick, it at least demonstrates that President Recep Tayyip Erdogan’s government is willing to take action to protect the country’s banking system.

Erdogan appears to understand that if Turkish banks cannot get hard currency funding, the country’s financial system will collapse and Turkey will default — a catastrophic event that could be a threat to his hold on power.

Department of schoolboy errors: household balance sheets

Confusing stocks and flows is such a bad, obvious mistake that it is a bit of a joke among financial journalists. It is not funny when you commit it, however, as I did on Monday in describing this chart:

The savings rate is a measure of how much income exceeds spending. It’s a flow measure. It is wrong to say, as I did, that this chart shows that the “extra cash consumers accumulated in lockdowns with help from stimulus cheques has been largely spent”. What it shows, instead, is that consumers are no longer accumulating savings at the high rates they did earlier in the pandemic.

So, by way of correcting my error, what do consumers’ stocks of savings look like? They look good. Households net worth is up by about $27tn, or 24 per cent, since the end of 2019, when the pandemic began, according to Federal Reserve data:

While households’ cash on hand has tripled, to $3.5tn, almost two-thirds of the improvement in balance sheets is down to stock portfolios and home equity:

The aggregate improvement of household balance sheets that occurred through the course of the pandemic persists. This should help keep demand strong and prices high next year, all else being equal. What is not equal, though, is the distribution of wealth in America, and how the new wealth is spread around will affect how much it supports demand.

But there is good news here, too. The Fed provides quarterly estimates of household balance sheets, sorted by wealth level. Here is how net worth and selected assets values have grown for various wealth strata:

The bottom 50 per cent have seen a greater increase in their net worth, in percentage terms, than the top 50 per cent, driven in particular by increases in the value of their homes. That is good news for demand, because working class people have a greater tendency to spend the incremental dollar.

Now, this may lead some readers to worry that the US has become some kind of damn socialist paradise. Let me reassure you that it has not. Here is the same chart, but showing the share of total wealth and assets by wealth level:

One good watch

My colleague Martin Sandbu has launched a video series about unorthodox economic ideas, Free Lunch on Film, with a fine piece on universal basic income.

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