Do people trust banks more than the state?

Dunya Executive - - COMMENTARY - Alaatt n AKTAS Economist

The Ministry of Treasury and Finance is trying to sell government bonds to citizens and companies. By “it is trying”, I mean sales are not going well. How do I know this? Well, they have successively made extensions and, more importantly, according to a statement by Minister Berat Albayrak, the value of bonds sold is very low.

We all know that it was forbidden to make a contract in foreign currency a while ago and that the existing contracts had to be converted to TRY. In spite of this decision, the state’s attempt to issue bonds in foreign currency is a contradiction in itself; but this is another issue.

The problem is that people are not willing to buy government bonds. The first announcement on the issuance of the dollar and euro bonds was made on December 12. There was not much demand, so an extension was announced on December 20. Nothing happened. Another adjustment was announced on December 24 allowing legal entities to purchase bonds, which initially were only made available to real persons. Finally, on January 3, another statement extended the buying period to February 1. If bonds were selling like hotcakes, it would probably not be necessary to make another extension.

95 percent to banks 5 percent to government

The application for foreign currency bonds began on December 17, a Monday. That morning, the balance of foreign exchange deposit accounts in deposit banks and participation banks was $ 187.1 billion. By December 28, they had reached $190.5 billion. In other words, foreign exchange accounts increased by $3.4 billion in two weeks.

Applications for the foreign currency bonds ended on December 26 but we do not know the amount of foreign exchange accounts for that day because the data is announced on weekends. So I took the total from the end of the day on December 28, a Friday.

Treasury and Finance Minister, Berat Albayrak, announced two weeks ago that demand for foreign currency bonds was TRY 1.1 billion. People thought it was odd that he would use TRY for a foreign currency application. TRY 1.1 billion roughly equals $200 million. That’s a far cry from the $3.4 billion increase in foreign exchange accounts in banks from December 14 to 28. Using simple logic, we can say that over these two weeks, private citizens and companies deposited savings of $ 3.6 billion. In other words, they invested $95 of every $100 savings in banks and directed the remaining $5 into government bonds.

Which interest is higher: deposit or bond?

There is a huge gap between the increase in foreign exchange de- posit accounts and the demand for bonds. Is the interest rate causing this massive difference? Not really. The euro-denominated state bond annual interest rate of 2.5 percent is above the average interest of the banks. Banks do not exceed the 2.5 percent interest rate on government bonds in any term.

The interest rate applied to foreign currency denominated foreign exchange accounts is above the government bond interest rate in some maturities. The dollar-denominated government bond, for instance, has four percent interest. But in general, it is not possible to explain why private citizens and companies are not paying much attention to government bonds based on interest rates alone.

Moreover, although the maturity is one year, these bonds can be sold at any time with the accrued interest. Interest is good; waiting for the maturity date is not required. And yet, there is still no interest in these bonds. So, is it the case that people trust banks more than the government?

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