Why Currency Protected Deposit (FXPD) Accounts May Be Reduced?

I haven't written on economics for a while. I had previously researched a lot of details and scribbled something. 

Naturally, I am not an economist, so the things I wrote are only the things I wondered and researched. On the other hand, I shared what I learnt with you.

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In the last days, I had to write something about a subject that has been on my mind again.

Our government wants to reduce the exchange rate protected deposit accounts. 

In fact, a lot of interest is paid for these accounts with a volume of a hundred-odd billion dollars. As far as I understand, in order to pay this interest income from the central bank, the Turkish lira, which is printed gratuitously, increases inflation and this has a negative effect on citizens before the local elections.

The government wants to be successful in the local elections!

Perhaps with this reservation, perhaps with the thought that we are now having a very difficult time paying this interest, it was thought to reduce the exchange rate protected deposit (FX protected deposit) accounts to some extent.

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Let us analyse what may happen in this situation.

Let's say you had some savings yesterday, and since the state provided such an opportunity, you converted your savings into Turkish Lira, that is, you deposited it into a KKM account. 

It does not matter what your savings are, it can be an immovable property, foreign currency, or stocks, bitcoin-style crypto assets. Perhaps you sold your car and deposited it into the KKM account.

The important thing is that the purpose has been fulfilled and especially the foreign currency you have is now in the hands of the state. The state also spent these foreign currencies.

Now our state says enough is enough. It says it is necessary to reduce KKM accounts. 

Maybe banks are tasked with convincing you, maybe another customer.

But on the other hand, they especially do not want people to turn to foreign currency. 

I mean, what can investors do when they take their money from the KKM account?

They will either go back and buy foreign currency, move to the stock exchange, buy gold or crypto assets. Maybe there may be those who want to invest in real estate or automobiles again.

After all, when the interest rates given by banks to normal term accounts are below inflation, it makes no sense for those who have a certain capital to keep the money in Turkish lira.

If there is a shift towards foreign currency, this will be a big problem for the state. 

There is already no foreign currency in the coffers, and the borrowings may be barely enough.

After all, when there is not that much demand for foreign currency, the foreign currency borrowed temporarily from friendly Gulf countries and converted to be given back to the same countries in the domestic market keeps the exchange rates at a certain level, but when the demand for foreign currency increases, this situation may cause the exchange rates to explode because there is no foreign currency to meet the demand.

There is already talk that the foreign currency (when I say foreign currency, I am talking more about the US dollar) may rise to 32 liras.

Moreover, if this foreign currency shifts under the pillow, it will not be possible to return it to the central bank and it will be much more difficult to keep exchange rates under control.

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What is the solution?

Keeping the money in Turkish lira!

And how will this happen?

You raise interest rates!

If the banks say to the holders of the RRR, "OK, let us provide you with income above inflation", the depositors may be willing to keep their money in Turkish liras.

However, in this case, banks would also need to earn income above inflation with these Turkish liras in their hands, which the state, the owner of the money, used to guarantee before and everything was normal.

Today, the interest rate given by the state to banks, which we call the policy interest rate, is at a very low level, although it has been slightly increased recently, it is not possible to convince Mr Erdogan on this issue and it is not possible for banks to earn money from the state over the Turkish Lira in their hands.

Can they lend with this money?

Risky! The market is already full of zombie companies. If they lose money as a loan, you will be in trouble.

So what should the banks do? On the one hand, the state says to reduce the KKM accounts, on the other hand, it does not help at all.

That's why negotiations are going on between the central bank and the banks. The central bank probably says that my hands are tied, I cannot pay you more interest, and the banks say that they should pay more interest on the Turkish lira in the KKM accounts. 

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In fact, the state has found a solution to this paradox in another way. It sells bonds (government bonds) to banks at rates higher than the policy rate, and the physical profit from the bonds can be shared with depositors.

But why should banks share this profit with their customers?

They can already borrow money from the government at a cheap cost and earn enough money (through Turkish lira auctions or government bonds) by returning this money back to the government at higher interest rates. Is there any logic in sharing this income with other customers?

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I do not know very well where the balance of this business lies. I also do not know very well what kind of sanctions the state has on the banks. However, I know that the negotiations are going on.

It is actually a mystery whether there is a need for all this for the sake of spite. The formula for this is actually clear. The rabbits taken out of the hat do not stay at ease, nor do they want to get back into the hat.

Experts who think that this balance cannot be achieved are of the opinion that exchange rates will increase in the near future.

On the other hand, the stock market is also booming these days, as the money owners are transferring this money to the stock market where they deceive each other.

Although it is said that the hot money coming from outside has an effect on the rise of the stock market, but hot money also includes the risk of getting out of the market as soon as it finds the opportunity.

In short, I could not figure out where this will end up with such roundabout methods.

Nevertheless, we will wait and see what the effects of this request of the state, that is, the reduction of KKM accounts, will be.

What will be the result?

There is no money, brother, what salary increase are you talking about!

O civil servants, O pensioners, tighten your belts a little more!

I don't know, maybe we should tax you a little more as a solution, do you have the strength?

I say be prepared for taxes. How can you be prepared for taxes? But I think the state will again put all this burden on the poor.

Love and respect to everyone from Moscow.