New rules introduced by Turkey’s central bank to wind down a costly deposit scheme designed to support the Turkish lira are likely to push banks to increase their government bond holdings and thus help finance the gaping budget deficit, market watchers say.

According to the central bank, the regulations passed Aug. 20 aim to phase out the so-called FX-protected deposit scheme, which was introduced in December 2021 as an emergency measure to salvage the nosediving lira. Under the scheme, also known by the Turkish acronym KKM, depositors who converted hard-currency accounts to lira deposits are paid compensation by the state for any depreciation that exceeds the interest on the deposits. The central bank now wants banks to gradually encourage KKM depositors to shift to regular lira accounts. Banks that fail to meet ambitious transition targets are required to buy additional low-yield government bonds.

Written by Mustafa Sönmez