Turkey Backtracks on Bill to Use Bonds to Pay Banks in Lira Plan

(Bloomberg) -- Turkey is backtracking on a plan to use bonds -- instead of cash -- to pay for banks' possible losses from a new government tool to bolster the lira.

Turkey Set to Reverse Plan to Pay Banks With Bonds: Lawmaker

Under the now-discarded plan, the Ministry of Treasury and Finance was seeking approval to issue specially designed bonds to lenders if they lost money from the newly-introduced lira deposits linked to foreign-exchange rates.

If the plan had been implemented, banks would have been able to use the securities to pay lira deposit holders additional interest should the currency depreciate again. The goal was to preempt pressure on the Treasury's cash flow but the rapid turnaround suggests the ruling party may have faced strong pushback from lenders.

But the AK Party will now remove the clause on payments in bonds when the bill is discussed at the parliamentary Planning and Budget Committee, according to Cemal Ozturk, one of the governing party lawmakers who drafted the proposal.

The move is aimed at “eliminating uncertainties” in the form of payments to be made to lenders, Ozturk told Bloomberg by phone on Friday.

Lira Measures

President Recep Tayyip Erdogan on Dec. 20 introduced a new tool to minimize losses on lira savings during times of currency volatility. Under Erdogan's plan, the government will pay holders of lira deposits the differential if the lira's decline against hard currencies exceeds banks' interest rates.

How Erdogan's Plan to Halt the Lira's Fall Is Meant to Work

The bill under discussion was meant to allow the Treasury to make those payments in securities that can't be traded on the bond market. The notes could then be used as collateral to borrow from the central bank via repurchase agreements.

Critics attacked the proposed measure for its inflationary impact. Consumer prices rose an annual 36.08% through last year, compared with the central bank's official target of 5%.