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Will the Turkish lira rebound from a currency crisis?

By Piero Cingari

17:24, 21 December 2021

Close-up of Turkish lira on Turkish flag
The Turkish lira is travelling on a rollercoaster ride – Photo: Shutterstock

The Turkish lira (TRY) is on a rollercoaster ride, gaining 30% in one day as a result of President Recep Tayyip Erdoğan’s comments yesterday about halting the currency’s recent freefall.

The new measures announced by the Turkey government with the aim of alleviating the currency’s depreciation include:

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  • A new TRY deposit scheme designed to compensate depositors if the loss from lira depreciation exceeds the interest gain on the deposit.
  • The Central Bank of Turkey will provide TRY forward rates to exporters experiencing pricing challenges owing to currency volatility.
  • Withholding taxes on domestic government bond returns would be repealed, while corporate dividend withholding taxes will be cut to 10% in order to attract foreign capital.
  • Exporters and businesses will receive a 1% corporation tax reduction. The state contribution to the personal retirement system will be increased to 30%.

Lira’s wild ride in 2021

A chart showing the exchange rate USD/TRY in 2021USD/TRY 1-day candlestick chart and price changes in 2021 – Credit:

Fundamental cause

The major remedy recommended by the Turkish government is one aimed at comforting local depositors by guaranteeing reimbursement if the currency depreciation exceeds the interest rate received.

The details of how this will be implemented, as well as the sorts of deposits insured and who would be responsible for compensating depositors for foreign exchange losses, still remain unknown by market participants.

If the Public Treasury or the Central Bank is in charge of paying for the deposit losses, then it will imply a credit negative event as it adds foreign exchange risk to the public sector balance sheet.

Though the action illustrates the government’s intention to curb the Turkish lira’s freefall, the measure does not address the fundamental cause of the Turkish lira’s depreciation, namely the Turkish president’s economic policies aimed at lowering the cost of money in order to contain inflation.


1.26 Price
-0.030% 1D Chg, %
Long position overnight fee -0.0047%
Short position overnight fee -0.0035%
Overnight fee time 22:00 (UTC)
Spread 0.00013


0.66 Price
+0.160% 1D Chg, %
Long position overnight fee -0.0071%
Short position overnight fee -0.0011%
Overnight fee time 22:00 (UTC)
Spread 0.00006


148.52 Price
-0.130% 1D Chg, %
Long position overnight fee 0.0111%
Short position overnight fee -0.0194%
Overnight fee time 22:00 (UTC)
Spread 0.010


1.10 Price
+0.060% 1D Chg, %
Long position overnight fee -0.0080%
Short position overnight fee -0.0002%
Overnight fee time 22:00 (UTC)
Spread 0.00006
a chart showing the share of FX deposits vs TRY deposits among Turkish banks Share of FX-denominated vs TRY-denominated deposits – Data: Central Bank of Turkey

Long road ahead

TRY recovered some of its losses, hovering around 13 against the USD from an all-time high of 18.36, but it is worth noting that the depreciation year to date is still around 75%.

It is still too early to know if such moves can suddenly revive depositors’ enthusiasm for holding their savings in the Turkish lira currency following years of high volatility and returns regularly below the real interest rate.

Inflation in Turkey is still running above 20% and the Central Bank has lowered interest rates by 500 basis points to 14% over the past three months. The president’s latest speeches continue to emphasise the near-term plan to lower the cost of money to bring inflation down.

Turkish depositors’ confidence in their currency seems to have reached new lows. In addition to hard currencies, such as euros and dollars, there are now alternative assets outside the banking system, such as gold and bitcoin, which might accelerate the flight from TRY deposits.

A chart showing the inflation rate against the interest rate in TurkeyTurkey interest rate vs inflation rate – Credit: Koyfin

Read more: Business News: Investors wait for US inflation test today

Read more: Inflation: How Does it Affect Investment Stocks? 

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