Turkey – who is squeezing who?

It’s Wednesday and a shorter blog post, which includes the latest from Turkey and some music. The mainstream narrative against Modern Monetary Theory (MMT) has been ramped up significantly in recent weeks as a result of events in Turkey, where, up until yesterday, the currency had depreciated significantly. The screams for interest rate rises from bankers etc (of course! they profit or protect foreign debt exposure) have been deafening. But the most recent monetary policy decision was on December 16, 2021, when the CBRT reduced its policy rate (the one-week repo auction rate) from 15 per cent to 14 per cent. The ‘markets’ can’t really get a handle on the current government’s thinking because it is running against the mainstream in several ways, including cutting rates to reduce inflationary pressures (see Press release on Interest Rates – from the CBRT). Overnight a big swing happened after the government made a significant fiscal policy announcement. That will further confound the markets who were forced to scramble to close out short-selling positions as the lira appreciated by around 25 per cent in one day. The fiscal squeeze worked. You couldn’t make this stuff up.

Turkish lira appreciates sharply

I wrote about the situation in Turkey on Monday – Turkey tells us nothing about MMT – but MMT tells us a lot about why Turkey is in trouble (December 20, 2021).

Predictably, the Twitter heroes were out in force restating their assertions that the situation proved Modern Monetary Theory (MMT) was flaky.

They didn’t address the analysis I provided as all. That would be too inconvenient for their story line.

One character claimed that my implication that the IMF intervention in the first decade of this century was part of the story was far-fetched and typical ‘leftist’ delusion.

How did he reach that conclusion?

Well the last formal IMF program (standby arrangement) ended in May 2008, so how can I claim that in 2021, the IMF is implicated?


The IMF intervened with a Standby Arrangement that began on February 4, 2002 (ending February 3, 2005). A new Arrangement followed on May 11, 2005 which ended as noted on May 10, 2008.

As I explained in the blog post cited above, those programs forced a range of structural changes onto the Turkish economy which persist today.

They set in place the export-led growth strategy (which Erdogan still favours).

The financial market deregulation and the privatisation of many state enterprises including banks occurred during those Arrangements.

The reliance on large foreign currency-denominated debts accelerated as a consequence of the deregulation and reduced oversight.

The propping up of the banks through artificially high interest rate regimes managed by the central bank became the norm during those periods and persisted.

Sure enough, the policy stance is shifting as Erdogan approaches the next election and starts to assert a defiance to the mainstream macroeconomic policy mantras.

But the major shifts that occurred during those IMF programs set Turkey up for the issues it faces now.

That is undeniable.

So to dismiss the observations as ‘leftist’ delusions just shows the commentator really has no idea despite regularly tweeting a lot of gobblegedook about margins, fx rates, and all the rest of the financial market talk.

Anyway, since I wrote that blog post, the Turkish government has announced a major new fiscal initiative.

Among other things, the President announced that the Treasury (fiscal policy) would restore any losses that lira-denominated bank deposits held by citizens incurred as a result of the exchange rate shifts.

How would that work?

Assume the banks are paying 14 per cent for a 12-month lira deposit. If the currency depreciated by say 15 per cent then the Treasury will pay the difference.

That means that people who currently hold, say USD, can shift their funds into lira with a guarantee of no exchange rate exposure.

At my last estimate, around one-half of bank deposits in Turkey are denominated in foreign currencies (USD, euro, etc).

So essentially, the Government is assuming the exchange rate risk, which is a significant intervention.

And within a day, this is what happened in the foreign exchange markets.

Today, the lira is back to where it was at the start of December.

It depreciated 35 per cent between December 1, 2021 and December 21, 2021, but on December 22, 2021, it appreciated 25.4 per cent over the 24 hours.

No interest rates were raised by the central bank (CBRT). The most recent monetary policy decision was on December 16, 2021, when the CBRT reduced its policy rate (the one-week repo auction rate) from 15 per cent to 14 per cent.

The shift was provoked by the fiscal policy announcement.

The financial markets commentary today is full of investment bankers still claiming that interest rates have to rise.

Of course they say that – the institutions they represent make larger profits if rates rise and they are also wanting to protect foreign debt exposure.

The interesting thing is that this announcement has interrupted the speculators who had bet short against the currency.

The trading volumes today suggest a lot of loss-making positions are being closed out quickly (to limit the losses) as a result of the reversal in the lira.

It is an interesting story.

MMTed MOOC – Modern Monetary Theory: Economics for the 21st Century

Earlier this year we ran the MOOC and around 3,600 participants enrolled.

We are now in a position to offer the course again in early 2022 for all those who have been asking me for a chance to complete the program.

So, MMTed – invites you to enrol for the edX MOOC – Modern Monetary Theory: Economics for the 21st Century.

It’s free and the 4-week course starts on February 9, 2022.

The course is offered through the University of Newcastle edX program.

Learn about MMT properly with lots of videos, discussion, and more.

For – Further Details.

Music to stay calm with

I love this song – Apostle – which is taken off the second solo album by In the Skies – after he quit Fleetwood Mac.

The album marked a return to recording after a long period (8 years) of dealing with mental health issues.

It was released in May 1979 and has some really beautiful guitar playing on it.

Apostle had been earlier released in June 1978 as a single (backed by Tribal Dance on B-side).

I first heard it when I purchased the album. The version on the album was re-recorded and the original faded after being withdrawn from sale very soon after release.

On the album, Peter Green was supported by another great guitar player Snowy White who plays rhythm guitar on this particular track (Track 9 on the album).

Apostle was written by Peter Green as were all the tracks on the album (with some collaborations on some of them).

A remastered version was released in 2005 based, I believe on the original single release. That version is definitely very beautiful.

Martin Celmins biography of Peter Green (Castle books, 1995) is a must read for Peter Green fans – it is a very sympathetic and detailed account of a troubled genius.

Peter Green is my favourite guitar player (with Jimi Hendrix).

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.