What About the Lira?
You can think of this as another reader appreciation day, or as part of an addendum to Monday’s column- as you’ll see, it is very much linked to my arguments there. Anyway, a reader asked me about the lira’s prospects. Since quite a few readers have contacted me with similar questions over the past three years I have been writing in the Daily News, I decided to quote the question, with the reader’s permission of course:
I decided last year to invest all my savings in Turkey, lending basically to a local bank there (HSBC) in Istanbul. Every so often I go there and enjoy one of the most exciting places I have ever seen in my life, Istanbul and its people (I am planning to go there in six months time or so).
As you can imagine, that meant exchanging all my savings into Turkish Lira.
The reason for leaving the Euro was to ride the “EuroAsianTurkish Tiger” ( as stated by the Wall Street Journal!!) and dump the Euro for good.
I wanted to leave the Euro because I believe the Euro is bound to fail. This because of the recent sovereign debt crisis we are aware of (Greece, Ireland, Portugal) but also, because I know that Italy (and not only Italy in the EZ) is in pretty bad shape too in terms of debt, lack of competitiveness, corruption and inability of its government (as you can imagine, I am not a Berlusconi fan!) to make courageous decisions to steer the italian economy for good.
I am presently without a job, unemployment here is high, and my investments in Turkey are really my only source of income. I am reading and learning about Turkey and its pro and cons using the Internet, the FT and now thinking of subscribing to RGE. Being a small investor abroad is effectively becoming my full time job. I know it is risky, particularly now, but I thought to give it a shot.
I am writing because I would like to exchange with you my reflections on the Turkish economy (mainly for the reasons above!) and find out really where the turkish economy and the Turkish Lira is going.
So far it seems the Turkish Lira has heavily depreciated against the US$ and the Euro and, as you can imagine, this causes some concern to me.
Before I start I should say I am surprised by the sheer number of questions I have been getting like this, so I am wondering if there could be any way of knowing the amount of foreigners’ deposits- nonresident deposits do not work, as they include the big guys as well.
Anyway, there are many variables that factor into the lira’s prospects. I mentioned one of the most important of them in Monday’s column, i.e. the Central Bank’s monetary policy stance. At first look, it’d seem that lack of action by the Central Bank would put further strain on the lira, and Roubini Global Economics’ Turkey economists make that argument in a recent note on the lira.
But then again, there are other factors: For one thing, if the lira continues to lose value, I wonder at what level domestic residents will give up selling off FX, and therefore acting as a buffer against excessive lira depreciation.
And of course, there are global developments, which are, with the U.S. fiscal crisis, Eurozone debt problems and hints of a pseudo-QE3, anyone’s guess at the moment.
But the Central Bank will not just sit and watch the lira depreciate. I agree with Roubini economists that it would not allow excessive lira depreciation, by reducing or eliminating FX auctions, as a first line of defense. And if push came to shove, they would raise rates as much as necessary to defend the lira. So if I were my Italian reader, I would not be too worried in the medium-term. You might see continuing depreciation for a while (or even one large bout overshooting), which could make her investments in deep negative territory for a while, but the lira should eventually recover, if nothing thanks to Central Bank’s reaction…
In any case, note that as I argued on Monday, even without lira appreciation, government bonds are a very good deal if the Bank keeps her word not to undertake monetary tightening. The benchmark was above 9 percent when that column was published; it is now around 8.85 percent, but Treasuries are still not a bad deal at all…
2 Responses to “What About the Lira?”
L_G • July 22nd, 2011 at 10:20 am
At 2,4135 EURTRY and 1,6737 USDTRY lira seems very weak. When is it going to result in inflation?
edeliveli • July 22nd, 2011 at 10:25 am
Very soon… I had calculated the passthrough (time and amount) once. I am not in front of my computer right now, but let me find it and give you the link later on…Sent by BlackBerry Internet Service from Turkcell
