TR Monitor

Financial engineering gimmicks

‣ Financial engineering is a mathematic subject. It is about pricing financial instruments at the margin. It can’t be used for controlling large swings in the value of financial or real assets.

‣ If you are in dire need of foreign currency, you can’t financially engineer things so all of a sudden you come up with hitherto unused FX resources. As the Nobel Laureate Robert Lucas wrote thirty years ago, “there are no one hundred dollar bills on the sidewalk”. There is no manna from heaven in finance.

‣ Constraining importing and exporting firms – usually firms do both – by not allowing them to hold foreign currency is tantamount to telling them not to do business at all.

‣ Firms don’t hoard FX in order to make huge gains. They have to because either they have FX-denominated debts to pay soon or they need FX in order to import inputs necessary for their operations.

‣ Besides, equity capital is weak. Debt takes its place and the vicious cycle continues. If you curtail access to TL credits, usually working capital loans that are used in lieu of capital, they can’t survive.

‣ Furthermore, in a high inflation environment the already weak equity capital erodes faster. Firms will have to displace their FX assets and transfer them to subsidiary firms. Or, they will repatriate them and get them back as credit through back-to-back transactions.

‣ Alternatively, they will buy inputs and pile up inventories. There is no way, not only for exporters or an importers, but for any SME to continue doing business without holding FX assets. Almost all inputs are imported so everyone needs to hold foreign currency.

‣ Fortunately, this counter-productive move was tamed over the weekend. Otherwise, either most firms would resort to roundabout ways of financing and booking their assets or they would experience extreme duress.

‣ Whoever invents such engineering gimmicks only shows market players that she doesn’t understand business realities. Demand for dollars isn’t only, not even chief ly, a demand for speculative purposes. It is a consequence of the way any open economy with a large and permanent trade deficit works.

FINANCIAL CORNER

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2022-07-04T07:00:00.0000000Z

2022-07-04T07:00:00.0000000Z

https://trmonitor.pressreader.com/article/281672553642244

NASIL BIR EKONOMI MEDYA HABER BASIN A.S. (Turkey)