Foreign currency denominated public debt

► By one important metric, we are back to 2001. Admittedly, the 2001 crisis was the worst ever. It is telling however that the ratio of FX-denominated public debt to total public debt is now higher than it was then.

► It is 56.2% as opposed to 55.8% in the aftermath of the 2001 Crisis. It took almost eight years to clean that debt, and it was finally quite low in the early 2010s. Now it is what it is.

► Now part of the FX debt consists of domestically issued FX-indexed securities. It isn’t the root cause of dollarization; rather it is a symptom. But it reinforces dollarization also.

► Back in 2001, domestically issued FX debt had placed Turkey almost on a par with Argentina. Because FX deposits to M2 ratio is also nearing the 2001 level the situation is precarious.

► One error, i.e. prematurely cutting the policy rate, and dollarization might become unstoppable. In a sense it is obvious that the Turkish economy has come back to square one after 20 years.

► This time around there is no margin for error left though because, first, public assets have been already sold, and the room for enhancing non-interest Treasury income is much smaller.

► Second, both the overall FX debt stock and the FX debt stock and short position of the corporate sector are much larger. Furthermore, the amounts are higher and so are the stakes.

► It is one thing to finance a gap of, say, USD 25bn, another thing is to secure USD 100bn even though they are the same vis-à-vis the respective GDPs. A lot of debt has been incurred over the last two decades or so. But for what benefit?