Turkey begins withdrawing expensive foreign currency deposits

 ANKARA (Reuters) - Turkey's central bank on Sunday began unwinding a growing and costly system that protects lira deposits from depreciating exchange rates, marking another move toward more orthodox policies after a move toward raising interest rates.

The central bank said in the early hours of Sunday that it had lifted targets applied to banks for certain levels of foreign currency deposit transfers into the lira protection scheme, known as the KKM.

Otherwise, the central bank now wants lenders to set a new target of converting KKM accounts to lira current accounts, in part by discouraging companies and individuals from renewing KKM accounts.

According to a separate decree in the Official Gazette, the central bank also increased lenders' minimum reserve requirements for foreign currency deposits, further directing customers to lira current accounts.

President Tayyip Erdogan's government introduced the KKM regime at the end of 2021 to stem the currency's historic slide, which was caused by his unorthodox drive to cut interest rates despite rising inflation.

KKM's accounts have since grown to about $117 billion, or 3.1 trillion lire, about a quarter of total bank deposits. This has been supported by a roughly 68% fall in the lira over the past two years.

To cover the cost of KKM write-downs, the central bank paid an estimated 300 billion lira ($11 billion) in June and July, when the lira plunged again. The cost of this month was estimated at 350 billion lire.

The lira has been stable over the past month, closing last week at 27.02 per dollar, an all-time low.

After winning re-election in May, Erdogan appointed a new finance minister and central bank chief to shift policy by 900 basis points in rate hikes, and authorities also pledged to ditch dozens of previous regulations to cool inflation and balance the trade deficit.

The central bank said the KKM move would "enhance macro-financial stability by supporting lira deposits" and promised more such moves.

For foreign exchange accounts with maturity within one month, the reserve ratio has been raised to 29% from 25%, the official presidency gazette said in a separate overnight announcement. Those under one year have a ratio of 25%.

Hakan Kara, a former central bank chief economist who works at Bilkent University, said the bank was trying to "kill two birds with one stone" by raising deposit rates while limiting KKM accounts. "Official interest rates could have been raised without getting involved in these complexities," he added.

In a major financial development, Turkey has taken a major step towards liquidating costly foreign currency deposits. This strategic move not only has significant economic impacts, but also has the potential to bring favorable changes to investors. Stay informed about Turkey's decision to return these deposits and its impact on the financial situation.

Turkish Foreign Exchange Deposits: Understand the concept of foreign exchange protected deposits and why they were originally implemented to protect against currency volatility.

Economic rationale: Explore the economic rationale behind Turkey's decision to begin returning these deposits. Find out how this move fits into the country's broader financial strategy.

Investor Insights: Find out how this decision could affect investors, both domestically and internationally. Gain insight into the potential opportunities and challenges arising from the rollback.

Currency Dynamics: Delve into the implications of Turkey's decision on the dynamics of its currency and exchange rate. Analyze how this move could affect the value of the Turkish lira.

Government Policy Shifts: Discover government policies and regulations related to cancellation of foreign currency deposits. Get an understanding of the potential timeline for phased implementation.

Market Reaction: Stay tuned for market reaction to Turkey's announcement. Read about the initial reactions of financial institutions, investors and analysts.

Future Benefits: Explore the potential benefits that Turkey wants to achieve with this strategic move. These benefits could include improved economic stability, reduced costs and increased investor confidence.

Risk Assessment: Understand the potential risks and challenges that could arise as Turkey begins the process of returning these deposits. Evaluate steps the government could take to mitigate these risks.

Turkey's decision to bring back costly FX-backed deposits marks a significant turnaround in its financial landscape. As the country takes steps to phase out these deposits, it is imperative that it remains informed of the evolving economic dynamics and the impact it could have on investors, the Turkish lira and the broader financial market. In this ever-changing financial environment, keep a close eye on developments to make informed decisions.

In a major financial maneuver, Turkey has begun the process of canceling costly foreign currency deposits in order to optimize financial resources and strengthen economic stability. This strategic decision has far-reaching implications for both the country's financial situation and its global economic standing.

Turkey's decision to limit FX hedged deposits is rooted in a comprehensive cost-saving strategy. By gradually reducing dependence on foreign exchange-protected funds, the government is trying to achieve a more balanced and efficient allocation of resources. This move not only helps minimize exposure to currency risk, but also strengthens the country's ability to manage economic challenges more effectively.

As the rollback gathers momentum, investors and financial institutions alike are watching the fallout closely. The move is expected to promote greater transparency and trust in Turkey's financial policies and ultimately attract more foreign investment. In addition, a reduction in foreign exchange deposits could lead to a more competitive environment and encourage local businesses to seek alternative avenues of growth.

Although the process of returning foreign currency deposits is strategic, it is not without problems. Careful calibration and careful risk assessment are essential to ensure a smooth and non-disruptive transition. The government's commitment to a gradual and well-monitored approach underscores its determination to maintain economic stability during this process.

Turkey's decision to begin canceling foreign currency deposits is a sign of its proactive stance in optimizing financial resources and strengthening its economic base. As the nation moves through this transition phase, domestic and international stakeholders are likely to witness a recalibrated financial environment that prioritizes resilience, growth and long-term prosperity.