Turkey guaranteed lira deposits against FX losses and stopped a run overnight

After September 2021, Turkey cut interest rates by 500 basis points to 14% while inflation ran above 21%, and the lira lost 44% of its value in 2021. By December 20 it had hit a record 18.4 per dollar, and Turks were rushing to convert savings into foreign currency. Rather than impose capital controls or spend reserves defending the rate, the government announced late that day a new instrument: FX-protected lira deposit accounts (KKM).

The terms were simple: hold lira, and if the lira's loss over the account's life exceeded the interest you earned, the state would make up the difference. The market read it instantly — the lira, down more than 10% at 18.4 that morning, closed 25% higher at 13.15, its largest daily trading range on record, and touched 11.09 the next morning. Roughly $1 billion of foreign currency was sold as shorts covered.

The scheme did not stay small. By August 2023 KKM balances peaked at 3.4 trillion lira — about $140 billion, or 26.2% of all Turkish deposits. When orthodox policy returned after the 2023 election, the guarantee's cost came due; Reuters calculates the total bill at nearly $60 billion to end-2024.

The state sold insurance against its own currency

It attacked the incentive, not the symptom: depositors flee because staying is punished, and the guarantee removed the punishment.

It avoided capital controls and their lasting damage to a country's credibility with investors.

Converting an FX deposit into a protected lira account returned the dollars to bank balance sheets, easing funding stress.

The guarantee's cost stayed off the budget until depreciation expectations faded — but they did fade only after the policy pivot.

In a dollarization run, insure depositors against what they fear instead of defending the rate. The lira stabilized overnight without capital controls — but the guarantee cost ~$60 billion to unwind.

The guarantee froze the panic but not the underlying policy: the lira still lost 29% in 2022 and 37% in 2023 as rates stayed low, and the state paid out the difference. After the May 2023 election, Finance Minister Mehmet Şimşek returned to orthodox policy and wound the scheme down — the return on protected accounts was capped at 40% of the policy rate, balances fell from 3.4 trillion lira to 478 billion ($11.8 billion, 2% of deposits), and on August 23, 2025 the central bank terminated new openings and renewals, ahead of the end-2025 deadline.