Eğilmez: KKM incurred a $60 billion loss, this time carry trade is being ignored

Economist Mahfi Eğilmez wrote that the overnight termination of the currency-protected deposit (CCD) system caused Turkey a $60 billion loss, adding: “This time, the path to carry trade has been opened.”

The KKM system was introduced by Treasury and Finance Minister Nureddin Nebati in December 2021 and announced to the public by President Tayyip Erdoğan.

The Central Bank (CBRT) announced that the KKM application, which has been available since December 21, 2021, has been terminated as of tonight.

In Turkish Lira-denominated term deposit accounts, if the increase in foreign exchange exceeded the interest yield at maturity, the difference was paid to the investor by the government. The aim was to increase demand for Turkish Lira and reduce exchange rate fluctuations.

In his article titled "KKM disaster" published on his website today, Eğilmez wrote that this practice was the biggest cause of the MB's losses.

Eğilmez now stated that carry trade (interest arbitrage) is being ignored:

* The Central Bank announced today that it has terminated the opening and renewal of KKM accounts. This brings to an end a practice that lasted approximately three years and eight months and has become a symbol of irrationality in the economy, resulting in a loss of approximately $60 billion.

* This loss impacted society in many ways. The Central Bank, which made a profit of 72 billion TL in 2022, lost 818.2 billion TL in 2023 and 700.4 billion TL in 2024. The loss is estimated to continue, albeit at a decreasing rate, in 2025. While the KKM is certainly not the sole cause of the loss, it is the most significant.

* It's possible for the Central Bank to incur losses even without the Central Bank's Central Bank. This is a common occurrence, especially in an environment of increasing global uncertainty.

* Such a loss could arise due to exchange rates and the fluctuation of reserves (especially gold). Some of this could even arise as part of monetary policy. But our loss was largely due to the implementation of the CCC.

* What happens if the Central Bank makes a profit or a loss? If the Central Bank makes a profit, it transfers a significant portion of its profits to its main partner, the Treasury, in accordance with the provisions of its founding law. This money entering the budget thus contributes positively to financing the budget deficit.

* Conversely, if the Central Bank incurs a loss, the financing problem of the budget deficit will be exacerbated because such a transfer process will not occur. This is what has happened in the last three years.

* My father always told me, "If something is going wrong in your life, first look at yourself. Investigate whether you've made a mistake. If you decide you haven't, then look at others." When faced with rising inflation and a flight to foreign currency, driven by the rhetoric of interest rates as cause and effect, the economic administration realized the mistake was in this practice.

* I would like to add a word to my father's words: "If the mistake is someone else's, there are limited things you can do, but if the mistake is yours, the first thing to do to solve this mistake is to undo the steps that led to the mistake." Unfortunately, instead of undoing the wrong steps that led to the mistake, the economic management took an even more wrong path, introduced the KKM practice, and caused the country a loss of $60 billion.

* Now that the KKM has been lifted, we might think there will be no more losses, but unfortunately, that's not the truth. This time, carry trade has been opened up to remove the KKM.

* For some time, carry trades have been turned a blind eye to prevent the exchange rate from skyrocketing. This has also resulted in significant losses. If this is added, the total loss will exceed $60 billion.

* I don't know if we have eradicated the stubbornness to make similar mistakes after the KKM was abolished three years and eight months after its implementation.

In a carry trade system, investors borrow from a currency with a low interest rate and invest it in a currency with a high interest rate. They then attempt to profit from the interest rate difference while taking on exchange rate risk.