* Scheme protects deposits from FX depreciation
* Adopted in 2021 to halt lira crash
* After U-turn, Ankara wants to wind it down
* Bankers, data suggest most returned to dollars in Aug
ISTANBUL, Sept 4 (Reuters) – Turkish depositors mostly
converted funds back to dollars last month when they withdrew
from state depreciation-protected accounts, according to initial
data and senior bankers, as Ankara begins winding down the
scheme in a broad policy U-turn.
Since President Tayyip Erdogan won re-election in May,
authorities have raised interest rates sharply under the U-turn
and set a goal of reducing the near $130 billion-worth of lira
currently held at the accounts, known as KKM.
The central bank protects deposits from depreciation
under KKM, adopted in late 2021 to arrest a historic currency
crash.
But since then, the lira has shed another 50% of its
value – including 25% since this year’s election – ramping up
the scheme’s costs and testing confidence in the currency just
as authorities are seeking to reinforce it.
Two of the senior bankers told Reuters that since the
election, the central bank has continued to sell forex to
lenders in order to meet the demand of those closing down KKM
accounts.
According to one of the bankers, 20% of the KKM accounts
that were initially converted to lira from foreign currency were
ended in August. Of those, around two thirds were converted back
to forex while the rest moved into regular lira accounts,
according to three bankers.
One former KKM depositor who declined to be identified said
they closed their account as it no longer appeared worthwhile.
“I didn’t earn anything after some time and then it felt
scary to remain in KKM, so I got all my money out and went back
to dollars,” the person said.
CONFIDENCE
The central bank is spearheading the pivot to more
orthodox policies after a series of lira crashes and soaring
inflation. It wants to reduce KKM volume to sharpen the
effectiveness of its monetary transmission mechanism.
The volume of these accounts decreased by 1.1%, or 40
billion lira, to 3.37 trillion lira in the week to Aug. 25, the
first drop in lira terms in eight months, BDDK regulator data
shows.
In dollar terms, KKM account volume is at a record $127.6
billion, or 26% of total deposits.
The bankers told Reuters some lenders were paying an annual
interest rate of up to 45% to those who converted their funds
held in KKM to lira deposits, with the rate on deposits of up to
three months rising around 10 points in the last week.
But they said depositors were cautious about moving funds
into lira deposit accounts just yet given expectations that
deposit rates will rise more. More will shift into plain lira
accounts – rather than dollars – as that happens, they added.
In the week ending Aug. 25, foreign currency deposits of
domestic residents and companies increased by $4.78 billion,
according to official data.
The central bank’s net international reserves have risen
sharply from negative levels in early June. But that trend
halted in August at a peak of more than $15.7 billion as more
KKM accounts were shuttered.
In the last three weeks, the central bank’s net FX reserves
have dropped $1.4 billion to $14.3 billion.
Separately, according to first-half balance sheet data from
some banks and economists’ calculations, three quarters of the
$127.6 billion held in the KKM system had been initially
converted from foreign currency rather than from lira.
(Reporting by Ebru Tuncay and Can Sezer;
Writing by Daren Butler;
Editing by Jonathan Spicer and Nick Macfie)
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