You have been spending the forex reserves of the Central Bank, then you have eroded the foreign currency assets of public banks. The answer to the question “What is next,” could be, “What else can there be? Will they print dollars in a cellar in Ankara?” This question sounds as absurd as it is at the first glance; however, there is a correct answer to it: “No. They are printing  it in another way, outside the Fed printing house.” In short, Ankara has not been printing banknote dollars but the Treasury has been, for a while, sort of printing “local dollars.”

Let me explain how: The current the economy administration in Ankara has this stance: “Crash the syndromes, not the issues.” This stance is accumulating a huge wreckage for the citizens of the country. Here are the consequences of holding the interest rates at negative real rates for a certain time and facilitating a giant Turkish Lira credit expansion:   

1. Central Bank’s forex reserves worth around 60 billion dollars were eroded by transferring them to public banks through “back door” methods and sold, to hold the forex rate at a certain level. 

2. In addition to this, forex positions of public banks were eroded by sales and their open positions reached the level of 12 billion dollars. (Open position means forex assets are lower than forex liabilities.” 

3. The Treasury gave up on the main principle of paying foreign debts, which was “borrow as much as the principal, pay the interest out of pocket.” This was a principle it had adopted in past payments of foreign borrowings. Another principle was also abandoned which was “do not sell forex bonds domestically.” As a result, gold and foreign currency borrowings boosted in the past two years. 

In 2019, net 6.2 billion dollars, in the first seven months of 2020, 10.8 billion dollars, which makes a total of 17 billion dollars in two years were borrowed additionally. 

In the past period, several experts who take an analytic look at the figures are pointing out another issue; which is that the Treasury is increasingly resorting to “back door” methods in forex bond issuance domestically. 

What is happening can be explained as such: Before the forex bond sales the Treasury has announced, on three different dates, interesting account activities are observed. 

One day before it will sell forex bonds, the treasury transfers foreign currency in the Central Bank accounts of public banks, the amount of foreign currency these banks will buy. Public banks buy foreign currency bonds with this payment from the Treasury. Then, these banks send these bonds to their collateral accounts in the Central Bank. Probably
they borrow more Turkish Lira from the Central Bank for their expanded loan portfolio.

According to Central Bank data, the Treasury on July 16, July 28, and on August 12 transferred 2 billion dollars, 3 billion dollars and again 3 billion dollars to public banks respectively. 

According to Banking Regulation and Supervision Agency (BDDK) data, on July 17 and July 29, public banks bought 2.1 and 2.8 billion dollars’ worth of forex bonds with their newly arrived foreign currency which transferred by the Treasury day before. A similar account activity was seen on Aug. 14. A major portion of the 3 billion dollars foreign currency bonds sales of the Treasury is apparently bought by public banks. 

The total amount of forex bonds the Treasury sold on two different dates in July is 5.5 billion dollars. Approximately 5 billion dollars have been bought by public banks. In those mentioned weeks, there is no increase in the forex accounts of public banks of their own clients. This makes one think that the foreign currency cash is transferred to public banks by the Treasury through “back door” methods in a daily deal.

Some experts guess that the Treasury first sold foreign currency to public banks this way, banks were able to cover a part of their open fx positions with this cash, then buy the Treasury’s bonds and return
them to the Treasury. 

Therefore, reserves have been eroded to hold the forex rate as a result of wrong policies. As well, we see that the Treasury is “printing” forex bonds to create additional foreign currency for its own operations. Public banks, on the other hand, are spending their cash foreign currencies and replacing them with forex bonds the Treasury is printing. 

They may not be dollar banknotes but the Treasury is printing bonds denominated in gold, Euro or dollars. These are seen as foreign exchange reserve assets in the balance sheets of banks, investment funds or other local corporate investors.  

What is achieved with this? 

The Treasury has issued 17 billion dollars of gold and foreign currency bonds in the last two years. This means, by creating foreign currency assets, it has collected cash foreign currencies from banks or financial institutions that had them. 

The reason for this can be, first, to create foreign currency assets (although they are not foreign currencies) accepted as forex in balance sheets for public banks to continue their forex operations. Second is to loan in foreign currency to curb the Turkish Lira interest rates in the financing of the budget deficit. 

It is difficult to say that these domestic forex bonds can be processed abroad. Those who accept them as foreign currency and add to their portfolio are limited because they are not issued according to international law. 

For gold bonds, I have not heard any other example in the world except for India that has foreign exchange restrictions. It is known that India makes very limited sales to individuals and corporations to prevent these bonds becoming too attractive. 

Loss in gold bonds

With the “presidential regime” introduced in 2018 in Turkey, the Treasury has started issuing gold bonds or gold certificates and rapidly borrowed. 

Between 2018 and July 2020, during a two-and-a-half-year period, the amount of borrowing in gold has been 181 tons, corresponding to 8.5 billion dollars. As of August 2020, unmatured gold debt is 179.9 tons. We can see that the gold the Treasury has is 41.6 tons in the account held by Central Bank. If this amount is subtracted, then the Treasury’s net gold debt is 138
tons. 

The average cost of borrowing 138 tons of gold is 1,561 dollar per ounce. Nowadays, in international markets, gold prices have exceeded 2,000 dollars, but have gone down to around 1,950 dollars. 

This means a loss of 12,508 dollars per kilogram. In other words, the Treasury has borrowed when gold prices were low, has spent it; and now when gold prices climbed, it is facing loss. This makes a loss of 1.7 billion dollars for 138 tons of gold. At today’s rate, it is 12.7 billion Turkish Liras. 

Gold prices are high because of the pandemic. As long as this continues, the Treasury will keep losing.  Another viewpoint is that “The Treasury is borrowing outside but the Central Bank is accumulating gold. It will profit anyway. The Treasury will close this loss with the profit from there.” 

However, there is a technical problem. While the debt of the Treasury is paid as it is due, extended over time, the gains of the Central Bank from its gold’s appreciation are not transferred to the profit and loss account and distributed. It is, as it suggests, a “valuation account.” 

As long as the Central Bank does not sell this gold in the international market from a high price, this profit will remain on paper as “excess of the valuation account.”

Another issue for the Central Bank is this: Let’s say gold prices went up to 2,200 dollars and the Central Bank wanted to sell them. The issue is that the major portion of this gold is in the country. Collecting and transferring them to London would take six to seven days. By that time the market would change. 

Also, the Central Bank is holding this gold within the country not for profit but for security. If it were for profit, it would have held them in London or in New York. 

It can also be said, “If a vaccine is developed for the COVID-19 pandemic, then gold prices will fall.” But even if a vaccine is found, the pandemic will not end immediately; the factors that hold the gold prices high will remain. Moreover, there are factors that push the gold prices upwards. 

Huge losses in two items 

I calculate the 12 billion dollars deficit due to forex sales of public banks by an average of roughly 6.55 lira/dollar. Based on today’s rate, the exchange rate loss is 8.9 billion liras. 

The loss of the gold borrowing is 12.7 billion liras, with today’s prices. Only from these two items, the total loss of the Treasury is 21.6 billion liras. 

It is equivalent to the cost of 1,000 lira bonus each given to pensioners in two holidays. As a result, the Treasury is losing on one hand by having public banks have foreign currency open positions; on the other hand, it is borrowing in gold, a field that should never have been entered, causing a bigger loss. 

The economy management has dragged the economy into a crisis; the steps it is taking are of no good; it is causing the Treasury to lose and it has added a new price for next generations to pay.