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Author Topic: Your Money & The Risk of YTL Treasury Bonds  (Read 8412 times)

Offline Cosetta

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Your Money & The Risk of YTL Treasury Bonds
« on: March 27, 2008, 01:12:38 PM »
Converting your foreign currency into YTL-denominated bonds to profit from high interest rates is a risky business.  The main risks are twofold:  the currency devaluation risk and the risk of bank closure.

Over the last few decades the Turkish lira has gone through many devaluations. In 1997 and 1998, the lira lost more than 90% of its value.  In 2001, it again devalued 60% against the pound.  More recently, between November, 2007 and March, 2008, it has lost approximately 8% of its value.

If you look at historical exchange rates, at the end of 1993 the TL was 12,000 (old) TL to the dollar. At the close of business on April 6th, 1994, it was 34,000 to the dollar.   Around 2002 it reached 1,350,000 (old) TL to the dollar.

Below is a table of historical rates comparing the TL to the GBP.

From the table below, you can see that if you had sold sterling and bought high-interest Turkish bonds in 1996 or 1997, discounting inflation, you would have lost approximately 90% of the value of your investment (assuming you then wanted to buy back the sterling), minus whatever interest you earned in lira (on which you would have been taxed as well).

TL / 1 GBPYTL toYear to YearYear
old TLDevaluation
(minus sign -
is appreciation)
81,13811/16/1995
110,0100.364/15/1996
216,3610.974/15/1997
410,8640.904/15/1998
612,3980.494/15/1999
942,0410.544/15/2000
1,506,800    0.604/15/2001
1,838,186    0.224/15/2002
2,532530000       0.384/15/2003
2,442440000      -0.044/15/2004
2.592590000       0.064/15/2005
2.372370000      -0.084/15/2006
2.722720000       0.154/15/2007
2.552550000      -0.063/26/2008

From this historical table, you can see that the range of currency fluctuations since 2004 has been smaller than earlier years.  But had you invested in YTL-denominated bonds in April 2006 and later tried to convert back to sterling in 2007, you would have to pay 15% more to get back your sterling.  If the net after-tax gain from any bonds you might have bought was 15%, then you broke even.  But at the same time, inflation was around 10-12% so in reality, you lost that 12%! (This is not meant to be an accurate ROI, it is a simple approximation.)

The central bank has said the YTL is overvalued.  That coupled with real inflation of 10+ % means bad news for Turkish exports.  This invites the lira to devalue.

Drops in the value of the Turkish lira tend to precipitate runs on the currency.   The currency spot markets take over and speculation is rampant, thereby causing further large swings in the value of the YTL.  In the space of a month, the lira can lose 25% of its value.


Turkey has a lot of deficit spending.  This has a negative impact on the value of the lira. Property purchased with bank loans frequently ends up being repossessed by the bank.  Much the same as what has happened with the sub-prime crisis in the US that has resulted in international market turmoil.

Turks often purchase goods on time payments, i.e., credit, and have wracked up a huge consumer deficit.  If there is a crisis in the economy for any reason, the lira can drop 12% in one day.

When a currency run starts, the private banks begin to dump YTL and buy foreign currencies to cover their foreign bond issues.  Turkish government foreign reserves are not sufficient to stabilize the lira on international markets.

To make matters worse, in an unstable monetary climate, many Turkish banks simply close down.  In the 90s and early part of this century, more than 30 Turkish banks shut their doors with no or little money returned to clients.  Since we opened our account in 1999, our own bank has gone into crisis and been sold 3 times.

Remember that high interest rates = high risk.  The higher the payout, the higher the risk.  If you still want to invest in YTL bonds to get a higher rate, put in only what money you can afford to risk.  Because if the bond pays 17% or 25% and the currency devalues 25% or more, you will break even or lose value.

Those who have lived through the ups and downs of the lira suggest that you would do well to invest only that amount of money in YTL that you plan to actually spend in Turkey, but keep your foreign currency invested elsewhere.

Linkback: https://enjoykalkan.com/forum/money-and-finance/44/your-money-and-the-risk-of-ytl-treasury-bonds/1287/
« Last Edit: March 27, 2008, 01:26:07 PM by Cosetta »
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Offline Diane

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #1 on: March 27, 2008, 01:59:05 PM »
Cosetta,
That was a brilliant, if rather depressing item, well done.

I am moving to Kalkan in April having recently married in Turkey. I am in the process of selling my UK house and in a quandry about what and where to invest the equity. The interest rates advertised by Turkish banks seems tempting at +15%, but I do know that inflation rates of +10%, as it is at the moment and much higher as previously happened, are not unusual and could quickly eat into any ''''profit''''. But, realistically I can''''t continue to draw on my UK bank account from the ''''whole in the wall'''', this is surely not the most economic way to obtain day to day living expenses.

I am also convinced, and sorry if I am going to upset British Kalkan owners here, that property prices in Kalkan are going to ''''stabilise'''' if not go down because of over supply and the downturn in the British economy. I am therefore very reluctant to buy at the moment. What do other''''s think?

I guess living anywhere, and perhaps more so in a beautiful place like Kalkan, comes at a price, and I believe Kalkan and Turkey in general has more than enough appeal to make up for a history of political and financial instability. However, lets not imagine that the ''''grass is always greener'''' and recognise, and again thanks to Cosetta for this, the pitfalls.

One more thing, does anyone know the financial restrictions on taking sterling in and more importantly OUT of Turkey. Always best to be prepared.............

Diane

« Last Edit: March 27, 2008, 02:02:08 PM by Diane »

Offline felicity

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #2 on: March 27, 2008, 02:45:20 PM »
Cosetta - welcome back and back with a bang with such an informative posting...!!   :o  Thanks so much - very interesting - i think we sometimes forget the risks of high reward...  Just look at Northern Rock and other such UK building societies going the same way and then you look at their bank credit rating against turkish bank credit ratings and you see - there are disadvantages and it is a risk..!!

Cheers!
Villa Kirmizi Lale - www.villakirmizilale.co.uk

Offline Pete

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #3 on: March 27, 2008, 03:10:22 PM »
Now thats what I call a proper posting.

Cosetta, that was truly excellent. I cannot fault a single thing you said. Absolutly bang on.


Offline Mercimek

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #4 on: March 27, 2008, 04:18:11 PM »
Very interesting to see the facts, I have always wondered why anyone puts their money in the ''high interest rate YTL'' accounts, as I cannot imagine any financial adviser recommending investing in a weak currency such as the YTL, due to the high risk involved. Remembering in 2001 when the value of the then TL halfed against the pound overnight, and many people lost half their savings/winter money without warning.

Offline yelkenite

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #5 on: March 27, 2008, 06:54:36 PM »
Yes exchange risk is always an often forgotten aspect of the downside to attractive earnings on foreign bonds.  Thanks Cosetta again for clarifying the issue.  As regards property values, whatever commodity or currency that attracts frantic buying there''s invariably a ''correction'' where those that have taken their profits see those that kept in that particular area, would suffer perhaps.  I dont see the screaming profits nowadays that you might have seen buying into Kalkan 5 years ago or longer but when I bought my apartment I didn''t necessarily view it as an investment.  I dont even rent at the moment as it''s me and my o/h''s slice of paradise.  Talking to a couple of restaurant owners last year they seemed to ignore any attempts to explain the downside of oversupply and I''m sure there''ll be quite a few people left with property on their hands locking their funds for quite some time to come.  I dont want the Kalkan that has been implied by all the new development anyway, I dont think any of us does. So perhaps the stagnation, if that''s actually whats happening, is a good thing. I saw in the latest ''A place in the sun'' magazine a picture of Benidorm in the early 70''s and what it looks like now.  I''d take Kalkan as it is now anytime!   Bill

Offline Cosetta

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #6 on: March 27, 2008, 09:34:31 PM »
J, yes you are right that one cannot extrapolate a real return from a simple point-to-point calculation (although returns are arbitrarily calculated on a calendar quarter / year basis, adjusted for distributions and expenses). Thus my disclaimer about ROI.  It was to illustrate a point, not to make a real year-by-year return comparison.

Re the stability of recent years, again true, at least with respect to years before 2004, but did you read the TDN article of yesterday, March 26 entitled ''''Crisis sweeps $90 bln from Turkish equities''''?  90 billion lira in a short time frame is not a small amount.  The YTL is very sensitive to political instability.

Yes, in theory the banks guarantee up to 50,000 YTL.  But what happens if they simply declare bankruptcy and cease to exist?  This has happened in past.  Do you think the gov is going to return every investor''''s deposits up to that amount?

If you are hinting at managing currency risk by hedging, or investing in currency baskets or forward contracts, I suspect most people would do better to avoid such highly specialized investment strategies.  Professionals have a hard time using these successfully.

Cosettina
« Last Edit: March 27, 2008, 09:43:27 PM by Cosetta »

Offline butterfly

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #7 on: September 19, 2008, 08:13:26 AM »
Dear Feds and Cosetta

In view of the current financial crisis, have your views changed on the merits of investing in Turkey rather than the UK?

Butterfly


Offline Cosetta

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #8 on: September 19, 2008, 09:16:43 AM »
If you plan to use your money only in Turkey and never convert it back to sterling, and  you do not have to sell stocks or bonds or other interest-bearing instruments at a market low, then putting what you need to spend here in a year into an interest-bearing YTL account is reasonable. 

But just since April sterling has gone from 2.6 down to 2.19, now around 2.25, I think.  The USD has gone from $1.50 down to $1.16 and is now hovering around $1.25.  Those are moves of greater than 20% between high and low just within this year.   With this kind of volatility you are running a currency risk if ever you want to take that money out of Turkey.

Offline butterfly

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #9 on: September 20, 2008, 11:00:40 AM »
Thank you Cosetta and the Feds for your useful advice from which I have concluded that if one lives here for most of the year, the best course would be to keep a sharp eye on the exchange rate and when it is next 2.5 ytl (insallah), change sterling for lira but deposit no more than 50,000 ytl in one Turkish bank account (which won''t be a problem in my case!).

Offline routemaster

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #10 on: September 30, 2008, 06:18:41 AM »
Dexia, the bank that owns Deniz Bank, is in trouble...

http://www.bloomberg.com/apps/news?pid=20601085&sid=aOIgsnKZCdF8&refer=europe

Offline Layla

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #11 on: September 30, 2008, 08:22:39 PM »
Any idea what sort of trouble?  The same trouble that is besetting pretty much all banks?  I do have a small amount of cash in an investment/interest account in Deniz Bank.  I suppose though it would be unrealistic for me to expect it is any safer than the Halifax shares I''ve recently bid farewell to . . . .  Layla x

Offline routemaster

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #12 on: September 30, 2008, 08:43:44 PM »
The same trouble as Fortis and B&B.

http://uk.reuters.com/article/businessNews/idUKTRE48T3T920080930

I don''t know what protection Turkish authorities offer to depositors in Turkish banks that fail.


Offline BevJam

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #13 on: September 30, 2008, 09:54:38 PM »
john covered it off in an earlier post
BJ
Carpe diem

Offline kalcamp

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #14 on: September 30, 2008, 10:00:27 PM »
''To make matters worse, in an unstable monetary climate, many Turkish banks simply close down.''
 
 This is from cosetta, post one of this thread

 I guess the question is...is The Deniz bank Belgian or Turkish?

Offline kalcamp

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #15 on: October 04, 2008, 03:02:48 PM »
EnjoyKalkan SAFETY

Some text removed under forum rules




  Anyway everything does look ok in the financial world until it happens.
 How many of us sold our houses and cashed in our stocks and shares because we saw the ''''credit crunch'''' coming
 A few months ogo Lehman Brothers, AIG and the Halifax were doing fine
« Last Edit: October 08, 2008, 09:25:42 AM by Enjoy Kalkan »

Offline Mercimek

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Re: Your Money & The Risk of YTL Treasury Bonds
« Reply #16 on: October 08, 2008, 07:36:48 AM »
This morning the bank rate to buy YTL at Yapı Kredı is 2.43, just a few weeks ago I got 2.10- this demonstrates how much the currency can flucturate.


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