We Could Welcome a Superbond Soon

No further analysis is needed regarding Fitch's credit rating upgrade. Turkey’s rating, which had been quite rapidly and meaninglessly downgraded before, was raised again to "B+" from "B" for incomprehensible reasons. My opinion about these institutions never changes: They make their decisions based on political and diplomatic considerations.

The government had tried a drifting exchange rate policy to reduce inflation but their attempt ended in fiasco in 2001. Unfortunately, this type of exchange rate regime has a slight chance of success in Turkey.

Last week, both deposit and loan interest rates have been volatile after the Central Bank's further monetary tightening decision. Loan interest rates suddenly increased to 55-60% because the Central Bank had allocated the exact same quantity of reserves for the quantity of loanable funds which are greater than the loan growth rate determined by the Central Bank itself, which has obviously caused a sudden increase in costs. And of course, it is none other than borrowers who will pay for this extra cost.

This situation has also led to further growth of the gap between deposit and loan interest rates. If banks continued to provide loans at a rapid pace, this gap could generate great profit on paper. However, given the current situation, the Central Bank is trying to make sure that their funding cost and composition do not bring any loss, let alone some profit.

Many suggest that, after Egypt, other countries will give up control over exchange rates as well and raise their policy interest rates. Financial managers remember too well how tightly the monetary policy was enforced during Şahap Kavcıoğlu's term of office and they know that any monetary tightening that is implemented without liberating exchange rates and moving the policy rate to a more rational level will result in the “same old story”. If banks are allowed a limited loan growth, the ratio of nonperforming loans to total gross loans will inevitably increase.

No tactical move can eliminate the negative effects of this policy, which is expected to remain in effect until the local elections. The Central Bank has not made a move yet to stop or deter those who want to withdraw foreign currency in cash from the market. If this control over the exchange rates continues, a new scheme that is similar to the FX-protected deposit scheme, also known as KKM, could be invented. Perhaps a “superbond”, which was actually planned to be issued a year ago. And this superbond can help the Central Bank finally say "See, we got the situation under control without increasing the policy rate" but I don't know if the Ministry of Treasury or Finance would agree with this.

Let's suppose that they issued a superbond, the term to maturity of such a financial instrument should be six months and it must bring an annual interest of at least 50% so that the demand for foreign currency stops. In order for this bond to have a chance of success, it is best that it generates 55% interest, for starters. This way, it can compete with deposit interest rates but it will not be exceeded by them. After the first issuance, several more could be issued depending on the level of demand. However, the superbond should not be issued without freeing the exchange rates first.

The bottom line is that waiting for things to improve by keeping exchange rates and interest rates under control has never been the correct policy to follow. As the Government postpones transition to the free market, the economy gets worse and worse.