IBRAHIM – Checkmate

CheckmateThe lira has been rising tremendously for the last couple of days, and by the time I wrote this column it had already reached 25999 against the dollarMarket analysts whom I usually refer to were estimating that the upward tendency is strong, and hence a pullback is not likely soon.We are now facing a catch-22 situation.

The central bank lost its weapon to intervene in the currency market through interest rates a long time ago thanks to political pressure. None of the analysts predict a hike in the policy interest rates (in the one-week repo rate), although almost all of them deemed it unavoidable under the current conditions.

Then there is the second option for the bank, an open intervention by spraying the markets with dollars to cool their feverLast year, in January, the central bank drew this gun, too, pumping more than $3 billion into the market, and the result was ineffective. If your interest rates are lower than what is necessary, selling dollars is as vain an endeavor as filling an abyss.

Likewise, the bank has been selling at least $40 million daily, but often increases this amount by 50 percent, and the interbank market has absorbed the dollar spill with not even a lull in currency rates. That is to say, the appetite for the dollar is real and sating it seems difficult since the reserves are too valuable for the central bank to easily spare.

So, when the market players perceive the inability of the central bank to use its most effective instrument of interest rates, and the ineffectiveness of selling dollars, they want to hedge their risks by racing to collect as many dollars as possible before they rise furtherThe Brazilian Central Bank had to raise the key interest rates by 50 basis points on Thursday, a day after the Indian Central Bank slashed them by 25 basis points. Ours is poised to pull them down by about 25 percent to boost the economy, saying the core inflation rate seems to be moderate.

OK, but how about savings?In a country where the local currency has depreciated nearly 10 percent in one month, how does the propensity to save change? It declines if interest rates are less than the rate of depreciation of the currency. The annual interest rates are in the ballpark of 85 percent for deposit accounts in Turkey.

When a local currency loses its ability to act as reserve currency, dollarization ensues. If the money holders see the alternative cost of saving in banks as far more than keeping their money in dollars, and if they are rational beings, why should they insist on writing it off? Like a vicious cycle, such a tendency feeds its underlying factors.

Rising demand for the dollar will lower the value of the lira, and this will create more demand for the dollarHow did we get here? Clever, considerate and devoted experts from this country have all been warning President Recep Tayyip ErdoIan and certain government members about the risks of railing against the central bank. But the politicians werenand#39t able to resist the seduction of showcasing Turkish Central Bank Governor Erdem BaII as a whipping boy to blame for the impending economic problems.

They succeeded. Many people in the country are now thinking that the central bank failed to lock steps with the government out of ignorance, fecklessness or malevolence.

Some of them even believe that ErdoIan was absolutely right when he accused BaII and his primary supporter in the Cabinet, Deputy Prime Minister Ali Babacan, of andldquoselling the country by causing the interest rates to remain high.andrdquo ErdoIan and his acolytes checkmated the economy, and these supreme strategists were finally able to bring it to heel.

The economy has been beaten.What we are witnessing today is no illusion.

It is real. And we have to start talking about a depression now.

The fear of a crisis is creeping, the signals of a depression are becoming increasingly apparent, and this time it may be much more painful to save our skins than it was in 2001.

SOURCE: Today’s Zaman