The Turkish lira performed horribly for most of 2021. Then in December, the government announced a new plan to stabilize the currency. The move is controversial and confusing. And while it initially caused the currency to rally significantly, much of that move has already reversed, amid high Turkish inflation. So how is it designed to work? To learn more, we spoke with Lütfullah Bingöl, economist at Albaraka Turk, to break it down. Transcripts have been lightly edited for clarity.
Joe Weisenthal:
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway:
And I'm Tracy Alloway.
Joe:
It's pretty incredible how you know, for the last several years, maybe 5, 6, 7 years, I feel like there is this rhythm where maybe like every nine months or every year, the world really turns its focus to what's going on with Turkey. What's going on with Turkish monetary policy and what's going on with the lira
Tracy :
Yeah I know what you mean. It does seem to pop up like at least once a year and suddenly everyone's very focused on it. And then within a month or two people seem to have forgotten it, or at least it's moved out of the limelight, but I have to say, we're recording this on Christmas Eve December 24th.
And this week in particular has been one of those where everyone wakes up and decides that they all have opinions on Turkey and what's going on there. And to be fair, we have seen this enormous amount of volatility in the lira so I, I think the lira was up something like 25% on a single day, this week after Erdogan announced a new mechanism to try to stop its halt. And before that it was down, I think it had lost like half its value over the past three months. So just crazy moves in the currency.
Joe:
Right. There are a lot of EMs which see significant currency volatility. You know, we see it in Brazil from time to time. We see it in South Africa and so forth, but there seems to be nothing quite like the volatility that we see in the lira. And as you mentioned, and you said the lira rallied 20% in the day, I think it was up like 35% from the lows of that day. Cuz I think in the morning it was down 10%. But as you mentioned president Erdogan instituted a new mechanism to attempt to stem the decline and we'll get into how that works. But yeah anyone interested in currencies, monetary policy, etc., had to be sort of jaw dropping at that move that day.
Tracy:
Right and the other thing going on with Turkey of course, is this rejection of economic orthodoxy. So when it comes to emerging markets, I think there's often a perception that, you know, EMs are different to developed economies for a variety of reasons, but there's always concern about fiscal discipline and whether or not they're going to be conservative, whether or not they have the institutional strength to, you know, keep the economy in check and keep it stable. And then when it comes to Turkey, we've seen I guess an extreme version of these concerns where Erdogan is rejecting economic orthodoxy, he keeps lowering interest rates and that's leading to inflation and that's causing the currency to fall. And no one really knows how to interpret it, I guess.
Joe:
Yeah, I think that's right. And you see it from time to time that various EMs will say have a central banker who is very steeped in sort of neoclassical economics and whether the sort of measures are successful or not. There's always this sort of portrayal to foreign investors of fiscal discipline and central bank independence and macroeconomic orthodoxy. And I think people look at Turkey and they see an example of a country and a system that's very much not playing by the standard playbook. And then they see the volatility and they say, oh, well this is what happens when you don't. Well, you don't follow the rules laid out by the University of Chicago economics department.
Tracy:
Yeah. That's one way of putting it.
Joe:
Yeah. Anyway but I still, you know, I, again, I sort of mentioned so many like tourists look at Turkey and I don't think we have like a truly deep understanding of what is going on in the economy, the approach to monetary policy, see what is going on with the lira and so forth. So I'm very excited about our guest today, who is going to help us understand everything about how the Turkish economy and monetary system works. We're gonna be speaking with Lütfullah Bingöl. He's an economist at a bank in Istanbul, Albaraka Turk. Lütfullah thank you so much for joining us.
Lütfullah Bingöl:
Thanks for having me, Joe.
Joe:
So why don’t we start, I mean would you say it's it's a fair characterization, this idea that Turkey, in a very overt sense does not want to play by the same playbook as many emerging markets typically attempt to.
Lütfullah:
There are some similarities with some periods with some countries, but Turkey has some very unique, fundamental conditions. Some of these are issues and some of these are strengths and the Turkish economy is of course bound by these. That is why sometimes Turkey makes different choices than the rule book. I'm not even sure a proper rule book exists for emerging markets. But you know, that will be one of my arguments today. There is no rule book for what Turkey goes through and there will be one, if this instrument works,
Tracy:
You're talking about the attempt to stabilize the lira that was announced this week. But before we get to that, can I just ask a really basic, and I guess this is the obvious question, but you know, what is with all the interest rate cuts? Like where does the refusal to actually raise interest rates come from? And what's the rationale for going in that direction?
Lütfullah:
To answer that question, I'm gonna have to provide an entire framework, which I was planning to do anyway. So should I go ahead...
Joe:
Please go for it.
Lütfullah:
First off. It's gonna sound like a cliche, but I do not believe in structures or, you know, claims. I believe in incentives and for various reasons I'm gonna talk about today the central banker's goal of price stability and the policymaker's goal of, you know, having growth, providing jobs, those are two conflicting goals in the case of Turkey. And that is for precisely one reason -- because there is a huge amount of dollarization. And that is precisely why I do not see this week's move as just a short term measure to, you know, stabilize the lira, I see it as a crucial structural reform. I began this week extremely pessimistically. I had almost no hope, but now I'm rather hopeful because what they announced tells me that they diagnosed the problem right. And if the mechanisms announced work, we won't have that problem anymore. So for the first time in probably Turkish history, after the end of, you know, Bretton Woods perhaps, we will have a proper alignment of incentives. I think I will have answered the question why the policy makers, you know, add fuel to the fire whenever there is a global USD cycle downturn, whenever Fed hikes interest rates, you see central bank independence in Turkey disappear. I'll try to explain why is that.
Joe:
So why don't we get to it. Give us this sort of basic argument for, because I think from a sort of like foreign perspective, the typical story is Erdogan is pushing this very heterodox, unusual policy. It's not out of the central banker playbook. It's bad. It weakens the lira, and people flee to dollars and so forth. And it leads to inflation and price instability. It sounds like your argument is that it's something much deeper and much more structural with the Turkish economy and that it can't simply be attributed to these sort of idiosyncratic policy choices. So before we even get into the mechanism and we'll talk about that of course, what is it about the structure of the Turkish economy in your view that creates these cycles?
Lütfullah:
There are three types of flows that are inconsistent with each other. You have dollarization, you have the current account balance and you have the foreign capital inflows and outflows. There is no single interest rate that can balance all three of these in the case of Turkey. So whatever you do you'll sacrifice something.
And in the case of Turkey, given this structure, if you don't change anything, you take this as given if you aim for price stability, and the global central banks, especially Fed is hiking interest rates so you do not receive that much capital flows. There is no way you can grow basically, that that will be my argument. And any policy maker anywhere living in a democracy wants the economy to grow. And if something is standing in the way of that, that thing will be run over. That is what's happening in Turkey. And if dollarization issue gets resolved, I think you'll see Erdogan talking about interest rates a lot less.
Tracy:
Can you just, before we move on, can you talk about how dollarization became such a thing for the Turkish economy? Because of course there are a lot of emerging markets that have dollarization to some degree, they have people who, you know, don't necessarily trust the local currency and want to shift into something that they perceive as more safe, or they have a lot of trade that's denominated in dollars, things like that. But in Turkey, as you just laid out, it seems to be extreme. Or it seems to be more of an issue because of the structure of the economy. So how did that happen?
Lütfullah:
It started with a very premature capital account opening done by the late President Turgut Özal in 1989. With that capital account opening, he also let people have FX deposit accounts in local banks. So that's how it started. And throughout the nineties, there was this predictable pattern when whenever there was something wrong with the Turkish economy, you know, USD/lira exchange rate blew up. So if you are, you know, a household, if you're a person observing this pattern, this means you have now access to a put option. That's pretty much it in the case of Turkey. I argue the main reason for dollarization is that it's the only tail event hedge household have access to. And that's what makes this problem hugely pernicious, because if you treat it like some sort of simple portfolio choice and try to solve it that way, it doesn't work.
And I'll tell how they treated it that way, and it didn't work. And now for the first time diagnosing the problem right, that, you know, dollarization households holding dollars is a tail event hedge. And unless you completely replicate the payoff structure of that tail event hedge, there is no way you can prevent dollarization — you know, barring capital controls or something. So this is the first credible attempt to do that. I think that that's what I meant by they seem to be diagnosing a problem right. What do I mean by you can't solve this problem by treating it as a simple portfolio choice issue? If this is another risky asset, what do you do? You hike interest rates, right? You make the alternative more preferable, you should be able to solve your problem, right? But that does not work in the case of Turkey. Whenever you hike interest rates if other uncertainties are still there, households do not just go ahead and buy lira. They hold onto their dollars and they buy even more if the uncertainty is extreme.
And another issue is if there is a momentum in USD/lira exchange rate, you see households buying more, that is typical for the case of a put option. But if it was a simple sort of portfolio choice, there is a chance you might observe that, but it should not be this predictable. So I think one major difference is, let me give you an example. Let's say Tesla wants to, you know, dissuade put option buyers in its stock from buying put options. And to do that, if it's increased its dividends, would it work? I think not because the put option is a tail event hedge and increasing dividends does nothing to that.
Joe:
It would weaken Tesla’s balance sheet.
Lütfullah:
It would, yes. I mean, that was one of the things that happened in Turkey as well. It would do nothing to Tesla put buyers. So if you want to prevent folks from buying Tesla puts, you have to somehow replicate that payoff structure or remove uncertainty completely, but removing uncertainty completely means you can't grow either. And I'm not sure if that's something you want. I mean, providing a stock that is completely, you know, trading with a fixed price would solve that issue, but would you want that? I think not. So I think that's a good example of what we are dealing with here
Joe:
Before we go on. I just wanna clarify this, because I think this is important to understanding your argument. So in a typical portfolio channel, the central bank raises the rate and that creates some sort of like marginal incentive to hold lira. But if people are holding dollars as a tail risk hedge, then it really doesn't solve the problem. Can you just explain a little bit further this idea, the tail risk hedge against what, and you sort of mentioned the premature opening of the capital account in the late eighties, but what is the impulse to hold such a strong tail risk hedge, and how is the dynamic of that previously appreciated by policy makers?
Lütfullah:
Let me describe what happened when they tried to hide this. And for a while it looked like they solved this issue, you know, after 2001 crisis in Turkey, there was this IMF structural program. And, you know, the primary objective of that program was to decrease inflation, you know, control inflation, and to do that, you have to provide some sort of currency stability. And one of the major roadblocks in front of that was dollarization and it did something else as well. Dollarization weakens the monetary transmission mechanism. So they tried hiking the interest rates a lot, providing a huge amount of real interest rate to savers should have done the trick. And for a while it did. I mean after the 2001 crisis, the dollarization rates in Turkey was around 60% and in 2012 it was down to 25%.
So it seemed like it resolved the issue, right? It didn't, it created a huge and various structural issues the Turkish economy is still dealing with today. One of the things it did was — by the way — for about 10 years, Turkish economy offered 20 points of real interest rate. It is prohibitively expensive. That’s why I said, you know, fixing the price of Tesla indefinitely would solve the issue of put buyers. That's pretty much what happened. It was so expensive that it removed almost all voaltility so it did not make sense, statically not dynamically, to hold dollars. So it decreased dollarization. But it also created another issue. And for us to understand how this issue emerged, I'm gonna have to talk about the incentive structure of the economy.
So a policy maker would want the economy to grow, right? Because that's how you create jobs. And if you create jobs, you get reelected and for you to grow the economy, there two things you can do, you know, on an accounting identity base basis, you can either increase liabilities or you can increase equity and you can, in the Turkish case, you can increase liabilities in Turkish lira or some other foreign currency. And if you want to do this, if you want to grow sustainably, you preferably gonna want to do this in Turkish lira because you are not able to print the foreign currency. But let's say a bank issued a new loan denominated in Turkish lira. If this was a closed economy, completely closed, no exports, no imports, no capital flows and there's a single bank, you know, reserve requirements or some sort, if there is one lira of loan issued, you have to have one lira of deposits, right?
It's an identity. There is no way this money could escape. So there is no chance of a bank run apart from the maturity risk or something like that. So fractional reserve banking. This is not, you have complete matching of assets liability in currency. The problem is there might be some bleeds in this structure. So let's say you issued a loan. It might turn into dollar deposits by households. It might go to dividend and net dividend and interest rate payments abroad. It might pay for your imports. You might get inflows from exports. This adds to, there is this issue of foreign capital inflows and out flows. And I include FDI in here as well. So if you notice what I described, the last four or five components of this equation is precisely the balance of payments equation. So that means if you issue a lira loan and you burn reserves, you'll have fewer lira deposits than you have lira loans.
And there are three components of this balance of payments equation. And in DM, there are only two that matter. You have foreign capital inflows and outflows, and you have imports and exports. In the Turkish case, there's a crucial third component that is dollarization. I'm gonna explain how these two are impossible to balance at the same time. Some folks are calling this the fear of floating. They're presenting it as a choice. I'm arguing that this is not a choice. This is simply a result of this structure. If you have this structure, you have no other choice than, you know, go for fear of floating.
So let's say you want to solve the issue of dollarization. And to do that, if you want to go the way of hiking interest rates like Turkey did in 2012, you have to increase it by a lot. You know, I'm talking 20 points of real interest rates when you do that, the currency stabilizes. So that's good. Alright. Foreign capital probably flows in because you're paying a huge amount of money for them to do that. But your exports and imports are not gonna match because you now made your exports hugely expensive for others and imports hugely cheap for your own consumers. So if you try to solve dollarization by hiking rates, you'll have current account issues. If you try to solve current account issues, you know, by devaluing your currency, then you'll have dollarization issues and foreign capital, net foreign capital issues, capital will flow out because there's momentum and instability breeds instability. There will be dollarization. If you want to solve foreign capital inflow/outflow issues with, let's say you hiked interest rates again, you'll have the problem with current account.
What I'm trying to say is if you want to take the structure as given and act as a monetary policy maker, there is no way you can do policy, a growth policy based on lira, if you want to solve dollarization, you can’t grow by issuing lira loans, issuing lira loans with this structure will breed instability. So what did the Turkish policy makers do to grow? They took this structure as given and acted in accordance with that. So they preferred foreign capital. If you can't issue lira loans, you can get foreign currency loans from abroad and invest and consume with that. And that's precisely what happened. And Turkey was able to grow on average 7% every year in the first five, six years of that period, after the 2001 crisis, the problem is this only works when the global USD cycle works in your favor.
And it did work in Turkey's favor at the time. There was this glut of USD liquidity, and that kept ongoing until the Taper Tantrum of 2012. And that was the reckoning. Because until that moment, everybody was praising the Turkish economy, you know, monetary policy as independent, but they are still able to grow and they solve the issue of dollarization. And there is no inflation. This is a successful economy they were saying, and it did look that way. The problem is once that global USD cycle reckoning came, this whole structure came crumbling down because now, uh, you can't get FX loans from abroad as well. You have a huge issue with foreign capital flows. And because of this structure, you are not able to grow by issuing lira loans in a sustainable manner, so after that point, you start to see Mr. President getting more anxious, getting more restless about the monetary policy. That's why I, in the beginning said, I, you know, look at incentives. I try to analyse incentive because it is completely a result of the incentive structure.
Tracy:
So can I just jump in here? And so just to recap, so Turkey has this dollarization problem. It's difficult for it to adjust interest rates in the way it needs to without causing some sort of current account issue. And that wasn't a problem for a while, but then we had the taper tantrum and we had a retreat of dollar liquidity. And suddenly this issue of dollarization really comes to the fore. Could you maybe walk us through what exactly Erdogan announced this week when it comes to the new FX mechanism, this new program, to try to halt the slide in the lira, and how it anticipates trying to solve that problem of using the dollar as a tail risk hedge, as you described.
Lütfullah:
I mean, most popular press covered this FX deposit instrument the most, but there were two other things in there as well. The main piece in that package was an instrument that completely replicates the payoff structure of that tail hedge. So if you deposit your money to this new instrument and the USD/lira exchange rates does not depreciate more than the prevailing central bank interest rate, you're gonna receive the central bank interest rate. But if the lira depreciates more than that interest rates, you're gonna be paid for that. So if the lira depreciates 18% and the prevailing interest rate is 14%, either the Treasury or the CBRT will cover your “loss” there. As I said, it it is a free call option on USD/lira exchange rate. If you are getting into this instrument from your USD deposit account, you're gonna be dealing with CBRT and CBRT will be covering your loss.
And if you have already a lira account and you put your lira account money into this new instrument, you're gonna be dealing with the Treasury and they will be covering the losses. And why did they do this? Probably because, you know, if it's already a USD deposit, dealing with the CBRT directly is easier. It becomes a CBRT reserve in that amount. And if you have a lira account, dealing with theTreasury is easier because, you know, there is nothing for the central bank to do, and it is some sort of a risk-sharing program, because if you know, half of the new money into this instrument comes from already USD accounts, and the rest comes from Turkish accounts. The Treasury will not be assuming that much risk, which was the main discussion point in the press, I guess.
Joe:
One of the things that people wonder is like, well, doesn't this just put pressure on the fiscal balance, taking it off the central bank's balance sheet, putting it on the fiscal balance. We've seen Turkish credit default swaps rise in recent days. Why does this actually fundamentally change anything rather than just as you put it, you know, shift risk away from the central bank onto the Treasury?
Lütfullah:
Joe, if it works, it actually will decrease the CDS premiums, because it transforms a balance of payments issue to a fiscal issue. And that fiscal issue is completely denominated in Turkish liras, it is something you can print and it should decrease risk in your foreign currency liabilities. This is the direct interpretation, if you use the framework. If you somehow solve the dollarization issue, if you are able to create this kitchen sink so whenever you issue new lira loans, you do not have to deal with the dollarization pressure. It will be the first time, I said this in the beginning, but it will be the first time in Turkish history that the growth goal of the policymaker and the price stability goal of the central bank are not gonna be indirect contradiction. So that is why I think it is hugely risk positive.
Joe:
So in other words, it sounds like basically what you're saying, if I could just sort of, essentially this creates a way for Turkish households to have a tail risk hedge that doesn't involve automatically buying dollars?
Lütfullah:
Yes, yes. That is it.
Tracy:
So can I just ask just on the fiscal question and whether or not this is going to impact Turkey's balance sheet, which has been, you know, one of the bright spots of the Turkish economy recently, so one of the perhaps unfair things about the way the world currently works is that foreign investors do have an enormous amount of power on emerging market economies in particular. And this is, you know, part of the problem of what's happened in Turkey is that we have bond vigilantes or inflation vigilantes who have gotten nervous about what's happening there and have put additional pressure on the currency. So I guess my question is how is Turkey going to get foreign investors onside for a new currency stability mechanism that people are unfamiliar with, and which on the surface looks like it's going to diminish the country's fiscal ability or fiscal strength?
Lütfullah:
I think there are basically three scenarios. First, if the take up rate of this new instrument is low, that means the Treasury is not assuming that much risk. That will be negligable, I guess. If the takeup rate is high, because of the current stock of foreign investment is Turkey, which is extremely low, especially in bonds, it is almost nonexistent. And they, I mean, foreigners can almost completely left the swaps as well. There is some amount of investment in equities, but that is for some reason rather stable. I mean, that lived through any type of crisis we had in the last four or five years including the 2018 crisis. So if you assume that equity stock is gonna be stable going forward, I don't think foreign investors matter that much. So that leaves dollarization and current accounts as the determinants of reserves and the exchange rates.
So if the take up rate is high and currently the Turkish economy is having current account surpluses and our internal analysis show that for their first time in September, as far as I remember, Turkey had a seasonally-adjusted current account surplus, this is especially positive because Turkey is a huge commodity importer. And despite the global commodity prices skyrocketing, Turkey is able to have current account surpluses. So that's good. That leaves dollarization and if the tak up rate is high here, that means the dollarization issue is getting resolved. In that case, you will not have an FX pressure. So the Treasury will not have much to deal with there either. So the last case is some exogenous shock. That is unpredictable. Can it happen? It can, but I don't think this mechanism increasing the, you know, pressure on the Treasury and increasing the risk there is a fair assessment based on the base cases. You know, the world is an interesting place. Some incredible thing might happen, but it's not my base case. Let's phrase it like that.
Joe:
Can you just explain real quickly? You mentioned Turkey is a commodity importer, commodities are very high. How is Turkey currently running a, uh, current account surplus?
Lütfullah:
Services are in huge surplus, mainly tourism. And you know, one good thing about Turkish tourism is, its elasticity to the real effective exchange is pretty high. So when need depreciate your currency, you get more bang for your buck than what you have in the goods side. So that is a huge positive. And if Covid is, you know, if Covid is not gonna be huge issue in the near future, which I think it will not be, but you know, that's a debate, Turkey will keep giving current account surpluses. One risk is, yeah, imports are way higher because of the commodity prices, but exports are higher as well because the global economy was staging an impressive recovery. If somehow the global central bank moves decrease that, you know, hurt that recovery more than they decrease commodity prices, Turkey might have some issues, but again, that's not my base case out there. I think commodity prices are much more susceptible to a USD cycle than global growth. So I'm overall optimistic about the future current account situation in Turkey.
Tracy:
I guess my next question is when would we expect to see, or would we expect to see published takeup figures for the new FX plan? And then secondly, what are you watching in order to see whether or not it's working? And I realize, you know, watching the lira would be, the obvious thing to do, but are you looking at the takeup figures or I don't know, maybe pressure on Turkey's foreign reserves or something like that to see whether or not this is actually pressuring Turkey's fiscal position?
Lütfullah:
Well, there is one main thing I'm looking at. I mean, the equation I talked about is more or less an identity. So I look at the difference between new lira loan issuance minus the new deposits in lira. So if that is not a huge number, that means things are going well. We are not burning that much, you know, that many reserves. If that number is giving negative signals, that means dollarization issue, dollarization pressure is still there despite the current account surplus. So that might be alarming. And I'm gonna keep watching that number going forward.
Joe:
You know, it is interesting because earlier Tracy asked about what it would take to get foreign capital on side. But to me the question that I'm sort of wondering about is the sort of like, I guess the domestic takeup — I mean, it’s basically what Tracy just asked. How much understanding does there have to be and how much convincing from the government from banks to retail depositors, to the public, to the depositors about how these new mechanisms will work and how does the the banks and government establish credibility that this, you know, this free put or this free dollar lira call option that they're being offered is actually going to be given to them? Is there a credibility risk on that side?
Lütfullah:
After such a hugely volatile period, there is a risk of credibility deficit. The fiscal position of Turkey is, as Tracy put it, one of its biggest strengths. So that argument and the basic structure of the new instrument should suffice. It is almost a no-brainer, excuse my language, but you're being offered lira interest rates on FX deposits, basically. FX deposits currently pay like 1%, 2% and lira pays around 15, 16%. And you are hedged against any upside in USD/lira exchange rate. So it is a complete no brainer. I think people will want to see, you know, their friends and family who got into this instrument getting paid first. And after that, I think the takeup rate will increase by the way, the Treasury ministry, today announced that there was, you know, about 10 billions liras up until now that got into this new instrument. I dunno if they're gonna regularly publish the figures about this, but, you know, we have this data at this moment.
Joe:
Well, you know, one question I have, it seems to me, and I don't know if this is, if I'm thinking about this exactly right. But it seems to me that it's one of these things where if it works, in theory, it wouldn't even be necessary. So you offer these special FX hedged accounts, basically. Some people have described them as like TIPs meet CDs. And obviously as you put it a free dollar lira call option, but it seems to me that, in theory, if it works, you don't actually need people to transfer the money into these accounts because the existence of these accounts has essentially stemmed the sell off. Is that a sort of like fair characterization or is that something that victory would look like?
Lütfullah:
That is a completely fair characterization and it is basically how it went in other countries that applied similar schemes like Brazil and Israel. There's a lot of talk about, you know, what Turkey is doing was tried before and it failed, things like that. I'd like to address that because there's a crucial difference. That's why I think they diagnosed the problem right because this is strictly limited to real people. This excludes corporates, this exclude foreigners, because there were some schemes in Argentina, there was one in Turkey’s past in like the 70s or something that targeted folks living abroad. And that is a surefire way of creating a balance of payments issue. Because if your target group has a balance sheet denominated in foreign currency, anytime they want to take their money out, you're gonna have issues with your reserves.
But because this is just, you know, exclusively for local folks who consume goods in Turkish lira and, you know, they care about the Turkish lira. They do not have a foreign currency denominated balance sheet. That is why I think they got it right. And is why I think this has a chance of working because wherever it did work, like in Brazil and Israel, this is why it worked. They did not target foreigners. They targeted the locals. They tried to solve dollarization. They did not want to attract foreign inflows because if you want to attract foreign inflows sustainably, this is a bad way of doing that. If you want to solve dollarazation this works,
Joe:
Lutfullah thank you so much that, I genuinely learned a lot from that conversation.
Lütfullah:
Thank you for having me. I'm glad.
Joe:
Yeah, that was great. Thanks.
Tracy:
Thanks Lutfullah. That was really interesting.
Joe:
I felt that extremely helpful. It's pretty complicated obviously. And you know, when I, sometimes in all these conversations, my head can hurt thinking about, you know, the capital account, the current account and all this, but this idea of understanding this new scheme is like a, you know, a tail risk hedge, very interesting, and very definitely helps me understand the situation better.
Tracy:
Yeah. Also your question about sort of the less people use it, the more it might work, that kind of reminded me of the Fed's corporate bond buying program from last year where it actually didn't end up buying that many corporate bonds because it didn't need to. Just the promise of coming in and stabilizing the market had the effect of stabilizing the market. But that said, it's clearly a big bet on people actually believing in this mechanism. And if it goes the other way, if there's a massive takeup and, you know, the Turkish government ends up having to monetize its funding for that, then you could see it being a problem.
Joe:
Yeah, this is exactly right. And I think, you know, if you think about, first of all, you mentioned the corporate bond buying program, also the municipal bond buying program, I would also put the OMT in the Euro area crisis, very similar thing, this idea of like, if you make a credible enough promise, you actually never have to spend any money is sort of like one of these core ideas in central banking. And it's like this too. It's like, okay, we credibly promise to compensate you if the lira plunges, so hold your money in lira and if the promise is credible and everyone holds their money in lira then you don't have the problem of the lira plunging and you solve the dollarization problem, which could be huge. So that's like a really interesting way, that was really helpful to think about it.
But as you said, just now, like it is a really big bet because the fear, it seems to me would be you have a significant portion of the population take it up, essentially like take up this insurance, but then you also have a significant portion of the population who like, if they continue to dollarize, the lira were to continue to plunge, and then the government is on to hook for this big put option that it's given everyone or a call option, depending on which side of the pair trade you're talking about, then you could see it being like a very costly bet from the fiscal perspective.
Tracy:
Totally. And I know you and I have both spoken about this all already, but it is a little bit reminiscent of certain cryptocurrencies that tell everyone to, you know, HODL, or if everyone just holds on and never sells everyone is gonna benefit. There is a thread of that in there.
Joe:
Yeah. There’s definitely game theory. That’s exactly right. Because like the sort of like the game theory of cryptos, like we all go to the one side of the payoff matrix. We all win. It does feel like there is like an element of game theory and it really is going to seem, does the government have the credibility to get everyone into this one corner of the matrix or enough people that it stems the decline, but look it was a huge rally in the lira when they announced that. And so there is obviously, as Lutfullah pointed out, some sort of like, wow, this potentially could be a game changer. Yeah.
Tracy:
It's working so far, but obviously we'll have to keep an eye on it. All right. Shall we leave it there?
Joe:
Let's leave it there.