ISTANBUL BLOG: Quick dive into Turkey’s monetary madness

The Turkish central bank’s net repo funding turned to a positive Turkish lira (TRY) 26bn ($828.8mn) on March 1, according to data from the authority.

Before a dive into what this is all about, it should perhaps be noted that this development has no tangible impact on the markets or real economy.

If you have little interest in how the monetary system works, there’s certainly no need to read the remainder of this article, you’re bound to have something better to be getting on with.

Screenshots: @e507’s tweets on the development.

When it comes to the current monetary system based on fiat money (no intrinsic value, not gold, not silver, not even copper or iron, and not even printed paper in the current digital age), it should be stressed that central bank money is entirely different from the money in our bank accounts.

Central bank money is only used by the banks and the central bank (they use only central bank money) for transactions among each other.

Screenshot: Arguments such as “Turkey’s central bank will withdraw excess liquidity to curb USD demand” become rather cloying when they are repeated a few million times.

For the sake of simplification, and at the cost of irritating bankers (this is a complex system; banks have treasury departments that deal with this knotty problem), we can move forward with an example:

1. If you are loaned TRY 100 by Turkish bank X, bank X writes down TRY 100 in your deposit account. It creates TRY 100 out of nothing. It has no relation to central bank money.

(In real life, Bank X needs to pledge a certain amount of required reserves at the central bank for deposits and, in Turkey’s specific case, for some loans. But this does not alter the reality that Bank X has created TRY 100 out of nothing.)

2. If you spend TRY 10 with your bank card at a shop that uses Bank X’s point-of-sale machine, Bank X erases TRY 10 from your deposit account and writes down a provisional TRY 10 in the shop’s deposit account. There is still no relation to central bank money.

3. When you wire TRY 10 to your child’s deposit account at Bank Y or spend TRY 10 at a shop that uses Bank Y’s point-of-sale machine, Bank X then needs to wire TRY 10 of central bank money from its account at the central bank to Bank Y’s account at the central bank.

If it happens that Bank X does not have the TRY 10 of central bank money in question, then it can borrow it either from the central bank or from the interbank market.

Or, if Bank X attracts a deposit sum worth TRY 10 from a customer of Bank Z, then Bank Z would be obliged to wire TRY 10 of central bank money to Bank X.

In Turkey’s case, the system is flooded with central bank money (FX sales in interbank money, FX swaps with local banks that stood at $45bn as of March 1, the paying of interest to the government-instigated “KKM” accounts protected from exchange rate losses). In this situation, no bank needs to borrow from the central bank, and the central bank’s policy rate becomes idle.

Turkey’s central bank argues that it needs to first absorb the excess liquidity in question from the system (by hiking required reserve ratios, the current selling of net FX to the banks, the holding of lira depo tenders, and the gradual cutting of the KKM volume) and activate its policy rate in order to see the benchmark’s effectiveness at the current 45%-level (the benchmark stood at just 8.5% last year, prior to the Erdogan administration’s economic U-turn that brought about a monetary tightening of 3,650 bp).

The economic officials pushing the argument state that they are applying a floating rate FX regime, but then in the same, or a consecutive, sentence explain that they intervene in the FX market.

They talk about building up reserves (the central bank pays central bank money to the banks in order to buy FX from them), while also stating that they will absorb the excess liquidity in the system.

It’s all of a piece. Erdogan’s flunkies will both curb inflation and boost growth. They both yell at Greece and sign military cooperation agreements with Athens. They both boycott Israeli products and say nothing about how trade with Israel is booming. They both describe all manner of opponents as “terrorist”, while transferring useful terrorists from Syria to Libya and back again.

There are infinite examples. There’s no need to take what they say seriously. That is the mainstream media’s job.

But if you do have an interest in developments in the Turkish monetary system you can subscribe to Haluk Bucumcekci’s (@burumcekci) daily bulletins. It is paid-for content, but an English-language option is available.

For Turkish readers, @e507 and @VeFinans write about the outlined issues on platform X.

For beginners in this field, there are Bank of England (BoE) explainers and assorted papers on who creates money and how, while the Turkish central bank has a Turkish-language video on the system’s funding needs.

Story chart: Turkish central bank’s net repo funding in February. Path on this link: All Series => MARKET DATA (CBRT) => CBRT Net Funding (Business, Million TRY) and Weighted Average Funding Cost of the CBRT Funding (Percentage) => CBRT Net Funding (A-B).

 

Chart: In the long-term, the net repo funding figure remains in positive territory. The abnormal jumps are mainly related to the FX operations. When the central bank heavily sells FX, the funding needs and the net repo funding jumps. When the central bank is heavily “building up reserves” in addition to paying interest to the KKM accounts, it dives into negative territory.

 

Chart: From 2020, when Turkey’s central bank began heavily intervening in the FX market, its net repo funding chart began to swell up. In January 2024, while the central bank’s FX reserves were “breaking records”, its net repo funding sailed through minus TRY 1 trillion.