The former co-CEO of failed US lender First Republic is bouncing back with a new job – taking on one of the toughest jobs in international finance

The adage that in life, when one door closes, another opens, could certainly apply to Hafize Gaye Erkan. In January last year, the native Turk surprisingly resigned after just seven months in office as co-CEO and heir to the throne of First Republic Bank founder Jim Herbert.

While her previous employer made the mistakes that eventually led to the company's historic collapse, the 43-year-old later took over the helm of Greystone.

The former Goldman Sachs chief executive didn't last four months there before stepping down again after the real estate finance company announced in December that she was seeking “new opportunities in the financial sector.”

Now it turns out that Princeton-educated Erkan has been named the first woman to head the Central Bank of the Republic of Turkey (CBRT) as President Recep Tayyip Erdoğan reshuffles his cabinet as President Recep Tayyip Erdoğan begins his third term in office.

There, Erkan will need all the skills she acquired during her doctorate in financial engineering as she faces one of the most difficult tasks in international finance ever – fending off a looming currency collapse in Turkey, triggered by Erdoğan himself.

His decision to keep stimulating the economy amid rising inflation prompted both international investors and domestic citizens to flee the lira. Erdoğan even argued that the best way to cool consumer prices was to keep borrowing costs as low as possible – in fact, this became his trademark of economic policy.

“The first and only question the media and investors should ask the new governor of Turkey's central bank is, ‘Do you think higher interest rates will lead to higher inflation?'” wrote Turkish political commentator and Erdoğan critic Can Okar on Friday.

Liraization strategy presented to persuade Turks not to dump their own currency

Instead, the CBRT blamed the Turks themselves for painfully high inflation, which Erdoğan's own officials said last stood at 44% a year in April. Specifically, they are accused of thwarting the central bank's price stability mandate by preferring to buy and hoard gold, cryptocurrencies, the US dollar or other governments' fiat currency.

The lira, abbreviated as TRY, fell into such disrepute among its citizens that last year the CBRT was forced to launch a special “liraization” strategy to encourage the country to use its own legal tender instead of relying on others to leave.

“The aim is to gradually increase the weight of TRY-denominated items in household, corporate and banking sector assets and liabilities in order to focus the financial system as a whole on the Turkish lira,” said the outgoing CBRT governor. Şahap Kavcıoğlu wrote in December.

It's hard to blame the Turks for wanting to abandon their currency. Thanks to Erdoğan Due to mismanagement in the economy, the lira weakened 44% against the dollar in 2021 and another 30% last year.

As a result, its current account deficit rose to a record $10 billion in January due to soaring imports. The country was forced the following month to temporarily limit purchases of gold, a popular store of value.

Currency reserves exhausted

Not wanting to further unnerve voters ahead of the crucial presidential election in May, the CBRT plundered the country's foreign exchange holdings, which it needed to fund its huge trade deficit, just to prop up the lira.

Indeed, international net foreign exchange reserves went negative for the first time in the 21 years that Erdoğan and his ruling Justice and Development Party (AKP) have ruled Turkey.

With their coffers exhausted and Erdoğan safely returned to power, the CBRT allowed the lira to float freely again – and the result was devastating.

Since the election victory, the lira has been in freefall, falling more than 15%.

The task of restoring confidence in the currency now falls to Erkan.

After giving up two CEO positions in ten months, she'll hopefully want to last longer this time, but she shouldn't be too comfortable in her new job.

The post of central bank governor is notoriously strained and contentious, and comes with a built-in ejection seat for Erdoğan's political reasons.

The AKP has its sights set on local elections next March, and the biggest trophy would be defeating Istanbul Mayor Ekrem Imamoğlu, Erdoğan's favorite political opponent.

If that means more rate cuts to boost growth, nobody – not financial markets, let alone Erkan – is going to stop him.

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