Turkey will not consider lifting its restrictions on the London offshore swap market before achieving a strong policy rate buffer over the inflation rate, unnamed people with knowledge of the discussions, told Bloomberg on October 9.

Well, there’s no need for the Erdogan administration’s new broom economic team to be shy. Let’s narrow down to exactly when the restrictions will come off. Pencil in April 2024, just after the local elections that will be held in March.

Until those polls, the June-installed “orthodox” economic masters (masters, that is, until the boss president Recep Tayyip Erdogan decides they are masters no more) will continue to gradually hike the policy rate on the path to positive real rate territory.

The economic team also know that delivering a bold currency devaluation would be bracing. But as things stand, the FX-protected “KKM” deposits scheme limits their space. In the run-up to post-election April, the government aims to cut the volume of the KKM.

A big devaluation would, of course, also create undisguisable problems for the official inflation series. So, for delivery, let’s count with a devaluation that’s not too big, but not too negligible.

Everything will be prepared to welcome in the global finance industry.

The problem is that Turkey needs some hard currency by April (or, perhaps by next summer when the high tourism season opens and portfolio inflows reach significant levels).

Every day now there is a Turkish minister in the Gulf meeting with an Arab counterpart. Finance honcho Mehmet Simsek has been travelling further afield to cities including London and New York in the intensive search for capital.

The finance industry media, meanwhile, continues to headline how “Turkey’s return to policy orthodoxy under President Recep Tayyip Erdogan’s new economic team has boosted the global appetite for Turkish stocks, bonds and currency.” Spot the spin. Give us a break.

When everything is summed up, we see that the USD/TRY simply heads north. That means there is no net FX inflow into Turkey.

On September 21, the pair once again broke through the horizontal barrier set at the 27/$ level. The latest record high, registered on October 9, is 28.1125.

The regime has lately been applying a ‘five/10 kuru (Turkish cent) devaluation per day policy’ in the struggle to stop the slide. As of October 10, the new daily trench was being dug around the 27.70-level.

Looking at the global markets, sentiment remains turbulence-free, despite the latest rise in US Treasury yields (sailing through the 6%s across the curve) that was followed by the rise in the USD Index (DXY) (into the 106s from the 99s seen in July).

Returning to Bloomberg’s sources, Erdogan’s economic maestros are concerned that removing the cap on the overseas lira supply could risk an increase in short-selling activity.

Money managers are said to have told Simsek in meetings that they see access to an adequate hedging mechanism as a pre-requisite.

Since 2018, when the lira entered the first phase of its unprecedented collapse, the lira squeeze for foreigners has been followed by periodically booming lira costs on the London offshore swap market.

Turkish banks are informally ordered to cut the lira supply on the market to prevent foreign traders from shorting lira, particularly when the stress on the local currency is high.

In 2022, Turkey’s capital markets board, SPK, also ordered local banks to not market supranational bonds, namely lira bonds sold by foreign banks, to their customers. These papers are an alternative way to access lira.