Is the market afraid of a super bond?


The recent developments seem to be similar to what happened in December 2021.

But the market plays it safer this time as the market players and citizens haven’t forgotten the hit they took in December.

Let’s remember what happened in December.

The Central Bank cut the interest rate from 15% to 14% at the Monetary Policy Committee (PPK) meeting held on December 16. Foreign exchange (FX) rates, which showed an upward trend, started to sharply increase.

President Recep Tayyip Erdogan emphasized on December 19 that the policy rate cut will continue.

Everyone, especially small account owners, attacked FX on December 20. They invested in FX. The demand sharply increased. USD/TRY broke a record and exceeded 18.00.

President Erdogan announced the FX-protected TRY deposit account (KKM) on the evening of December 20. Although they said this did nothing, FX was released to the market synchronously with this announcement. USD/TRY hovered around 11.00-12.00 in the morning on December 21.

This new instrument cut citizens’ demand for FX. In the meantime, FX sold to the market. Thus, FX rates, which had been under pressure, didn’t increase that much.

The stock exchange market almost collapsed in the days after December 20.

Now, the inflation-indexed bond, or the super bond, is on the table.

That’s why the market worries now about wether this borrowing instrument will be issued and therefore if FX rates increase. The stock exchange would then decrease.

Those who learned a lesson on December 20 are playing it safer.

For instance, FX rates increase but they don’t jump as much as they did in December. The stock exchange is declining slightly. Everyone seems to act carefully.

The main factor, which increased all these concerns, was the fact that President Erdogan has started to discuss the interest rate again.

But why is the super bond late?

As far as is known, the fundamental condition to initiate this inflation-indexed borrowing instrument is to change FX deposit accounts.

Let’s assume that FX is changed, and this instrument is purchased by consumers. What if FX rates increase more than inflation in the maturity period? Apparently, the ‘remedy’ will be designed and the payment of the difference to stem from the FX rate hike will be guaranteed.

There is another problem to be resolved. Since no one believes in the inflation figures released by the Turkish Statistical Institute (TurkStat), including its employees, a good amount of difference above inflation should be paid to attract the interest in an instrument, which will be indexed to the inflation announced by TurkStat. The difference is uncertain for now.

The main reason why this instrument, which means ‘putting a dynamite to the basis of the economy’ such as the KKM, hasn’t been implemented all this time is disagreement on such details.

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