Turkey’s Flagship Weapon in Lira’s Defense Gets Record Flows

(Bloomberg) -- Turks are putting their money into state-backed accounts that shield savers from lira weakness at the fastest pace since their December launch.

Deposits in so-called FX-protected accounts reached 290 billion liras ($21.4 billion) as of late Thursday, banking regulator chairman Mehmet Ali Akben said, up from the last official total of 209 billion a week earlier. That works out to an average inflow of 11.6 billion liras per day, the highest yet.

The pickup in interest in the financial instrument -- alongside interventions in the currency market by state institutions -- is helping stabilize the lira after a currency crisis list year, buying President Recep Tayyip Erdogan time to win over voters dissatisfied with the economy.

The currency has weakened less than 2% against the dollar since the end of December, trading in a narrow band around 13.50 per dollar. It fell to as low as 18.3633 against the greenback last year, in what was the currency's ninth straight annual loss.

Authorities have touted the new accounts an alternative to interest-rate increases, which the president has resisted despite rampant inflation. That's because the government has said it will compensate savers for any currency loss that exceeds the deposit rate payed by their banks.

In theory, that means policy makers can keep borrowing rates low without fueling demand for foreign currencies that has weighed on the lira. More than half of all bank deposits in Turkey are held in dollar and euro accounts, a hedge against currency losses that have eroded savings.

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Local investors have trimmed their dollar and euro deposits by about $11 billion since the facility was unveiled, from a record high of $239 billion in late December.

Still, Fitch Ratings warned that uptake of FX-linked accounts was slow. The product hasn't addressed the causes of a sharp deterioration in domestic confidence that has weakened lira, the ratings firm wrote in a note on Thursday.