What causes a record negative real interest rate?
✔ Anyone who can save is punished every day.
✔ On the other hand, deferred bills and checks are not accepted and cash is demanded.
✔ Treasury is satisfied with negative real interest rate; He is constantly accumulating ammo for pre-election.
I always say, he used to hold senior positions in the Treasury; I have a friend who almost managed the state treasury. Although he left his job in the public sector years ago, he never hesitates to think about the situation and to interpret the developments. Since he knows very well where we came from by going through which stages, he also interprets very well where we are going. But in his own right “bad” he has a habit; He does not want his evaluations to be used by name. Let me suffice to say that this choice is based on a task that he is currently undertaking.
My ex-Treasurer friend wrote an article about the problems created by the record negative real interest rate and shared this article with me. If I don’t share this tidy assessment with you…
Risks are rising
The world is grappling with the prospect of a recession. It is the same issue discussed by economists, especially in America and Europe. The effects of the expansionary policies implemented in the 2009 crisis and the covid 19 epidemic, energy and geopolitical risks such as inflationary pressures from food and the Ukraine war. Signs of tightening in the markets are increasing. Spreads increased in long-term bond markets. Transactions in leveraged and collateralized debt markets are at a standstill. Highly indebted companies, governments and households are under stress. More importantly, things are a mess in the unregulated and unregulated shadow banking space. In short, risks and interest rates are rising rapidly in the world due to inflation and other reasons.
In such an environment, Turkey’s domestic and foreign 508 billion dollar amount of foreign currency debt. It needs to roll over a debt of 183 billion dollars annually. The prints are increasing. The Treasury’s last 3-year sukuk (lease certificate) borrowing is a good example of this. The interest rate is 9.75 percent. The last time the Treasury paid such a high interest rate was in 2003 for bonds with a maturity of 5 years. The last time it made 3-term foreign borrowing was in 2009. However, the interest rate of that sukuk is 5.8 percent.
Printing is not just in this field. The economy is open to all external waves. The harbor breakwater is broken. Real, one of the protection walls interest negative. And by simple calculation, around 70 percent is negative. What might be the effects of high negative real interest rates in an open capitalist economy? Let me list the first ones that come to mind:
■ It does one of the heavy damages in the saving area. From the already insufficient TL savings “tax” being received. A very high tax. Those who rely on the national currency and have savings in Turkish lira lose. Those who deposit money in the Treasury’s domestic debt securities receive negative real interest, while those who deposit money in the same Treasury’s foreign debt bond (eurobond) receive positive real interest.
■ This leads to a rapid increase in dollarization (including currency protected deposits). When we take into account the Treasury eurobonds purchased by residents of Turkey, the dollarization rate approaches 75 percent. The most obvious effect of the negative real interest rate is seen in this area. Due to excessive dollarization, the CBRT policy rate becomes ineffective.
■ Moreover, those who have savings tend to short-term assets. ExchangeWe are watching what happens to small investors who turn to gold and digital assets.
■ Investments in production, which create long-term employment, are decreasing day by day. It is said that there are even those who are considering selling their existing factory due to rule of law issues and other reasons.
■ Real estate prices are inflating. As a result, there is an excessive increase in rents. Fixed-income people who have a housing problem want to be appointed in order to move from big cities.
■ When investments decrease, the output gap (the difference between potential production and actual output) decreases in the economy. Thus, the existing pressures on the supply side, such as food and energy, begin to come under pressure from the demand side. It is getting harder to turn the direction of inflation down.
■ The multitude of troubled (zombie) companies that choose to over-borrow because of cheap loans reduces overall productivity in the economy.
The treasure is pleased…
On the other hand, the Treasury is very satisfied with the high negative real interest rates. He is constantly in debt.
In the January-August period, the Treasury made a net borrowing of 188 billion liras in return for 88 billion liras of cash needs. One reason for the increase in borrowing is the deterioration in resources such as the primary surplus in the budget in recent months. Despite the almost 100% increase in incomes due to rising inflation and exchange rates, a sufficient primary surplus cannot be given as expenditures do not slow down. When interest payments peak, they are borrowed again. For example, according to the October borrowing program, 62 billion liras will be borrowed due to the monthly interest payment record, which peaked at 61 billion liras.
Ammo is being accumulated for a plentiful scoop distribution before the election. We will feel the inflationary pressures of the loose fiscal policy more.
The “accountant” logic!
Despite all these developments, the fight against inflation, “accountant” With this logic, the effects of high negative real interest cannot be eliminated by reducing it to intervention in the accounts of the Central Bank and banks. This policy option can save decision makers several months of time. Maybe that too! But what about the damage it creates in the economy in general, especially in the financial system?
Let me give an example. The shortened maturities and the decrease in banks’ lending appetite make futures transactions, which are based on memory and trust, difficult in the real sector. Cash is now demanded due to high inflation and negative real interest rates in sales of bills and checks with a maturity of 3 months or more. Companies stuck in cash are confused about what to do. When the “zombie” companies that have been in existence for a long time are added to the ones that are stuck in cash, the non-existent assets in the assets of the financial sector, which seem to be trouble-free for now, increase. Decision makers who see this are making preparations for a new Credit Guarantee Fund (KGF) package. This means more burden to the Treasury.
These and the like are related to cyclical problems, foreign dependency in production, etc. When structural problems are added, an external foreign currency Rate hike, which is the first thing to do to ward off the shock, is very difficult (even if there is intent).
“Well, what will happen then?” Don’t ask!
Everyone is aware of what happened!
Because I got stuck here. I didn’t know what to write.
I thought I’d suggest something. But to whom? To current decision makers? Or whoever is elected, those who will take office after the election? What will change? They are all aware of what happened. They delay speaking the truth openly. Just “How can I throw a dodgeball to another” they are in trouble!