Turkish Central Bank Intervenes to Stabilize the Lira (2025)

Turkey’s policy of stabilizing the exchange rate amid widespread protests may not prove sustainable and could force Ankara to allow for significant exchange rate depreciation, which would prove unpopular as it would lead to higher inflation or higher interest rates. The arrest of opposition CHP presidential candidate and mayor of Istanbul, Ekrem Imamgolu, has led to street protests in many of Turkey’s major cities, which has increased economic and financial uncertainty. This, in turn, has led to a surge in capital outflows. Instead of letting the exchange rate adjust, the central bank has decided to stabilize the currency by selling foreign-exchange reserves. The amount of foreign-exchange sales has been significant over the past week. Such large FX sales are also a high-risk strategy, as continued capital flows, including from domestic investors, would sooner or later overwhelm the ability of the central bank to maintain exchange rate stability and force the currency into a precipitous devaluation.The Turkish lira has been relatively stable since the beginning of the political crisis due to extensive central bank foreign-exchange sales. According to media reports, by March 25 the Turkish central bank spent a significant $28 billion of its gross foreign-exchange reserves since the arrest of Imamoglu on March 19. This compares to total official reserve assets of$171 billion and foreign-currency liabilities of $ 100 billion, as of March 14. According to additional media reports, following a conference with FM Simsek with several thousand investors, net FX reserves increased slightly.

> The Turkish lira is about 4% weaker against the dollar, compared to before the start of the protests. This week the lira has remained virtually unchanged against the dollar. Turkish equities are down more than 10%. Five-year credit default swaps, which allow investors to hedge against sovereign default risk, increased sharply from 250 basis points the day before the arrest (March 18) to 325 basis points on March 23, before falling to below 300 basis points. At this level, sovereign default risk is relatively low.

Large-scale FX interventions have helped maintain relative Turkish lira stability, but if political uncertainty continues or increases and capital outflows continue or accelerate, the authorities will be forced to scale back intervention and allow for a more significant exchange rate adjustment that could increase inflation. The Turkish authorities seem intent on stabilizing the Turkish lira to prevent a broader loss of domestic economic confidence. However, having already spent more than 15% of its official reserve assets and much higher share of its net reserves, this policy will not be sustainable if capital outflows continue at close to their recent levels. If this happens, the Turkish lira will depreciate sharply, forcing the central bank to reverse course and raise interest rates, which would prove politically damaging to the government, as it would lead to high inflation or higher interest rates (or both). This would also bring about slower economic growth or higher inflation (or both), which may help explain why the authorities have been willing to expend valuable FX reserves. The risk of a broader financial, let alone sovereign debt crisis will remain manageable as long as the authorities allow for a greater currency adjustment as foreign-exchange reserves over time and as net FX reserves are higher today than two years ago.

> Turkish FX reserves had increased tangibly since 2023 when the re-election of President Erdogan led to a policy of economic adjustment and reform. In May 2023, foreign-exchange reserves stood at $59 billion, compared with $97 billion the week before Imamoglu’s arrest. In 2001, a major devaluation of the Turkish lira led to a major financial crisis and helped sweep the AKP to power the following year.

Regardless of whether the authorities’ strategy pays off, short- and medium-term political and economic risks have increased due to the greater uncertainty about the degree to which President Erdogan will respect institutional guardrails and a lessened incentive to pursue economically costly adjustment policies at the expense of lower economic growth. President Erdogan will have less of an incentive to pursue stability-oriented macroeconomic policies in view of a broader clampdown on competitive opposition candidates. This is so because a disciplined policy in 2025 and 2026 would have allowed the government to stimulate the economy in 2027 in view of the 2028 presidential election without unduly increasing financial risks. The risk of a more expansionary, less stability-oriented macroeconomic policy was always going to increase in the run-up to the 2028 presidential elections, as a more expansionary policy would help increase economic growth and help garner greater electoral support. But now that the arrest of Imamoglu risks making the 2028 presidential elections less competitive, the need to implement economically costly adjustment policies will have lessened, as it is not necessary to establish a macroeconomic buffer to be able to stimulate the economy in the run-up to the 2028 elections. More broadly, concerns about political stability and weakening institutional and political guardrails will make investors wary about increasing their investments in Turkey over the medium term. 

> Foreign investors warily returned to Turkey following the 2023 presidential elections and the appointment of market-friendly Finance Minister Mehmet Simsek. With short-term political imperatives taking precedence over medium-term economic stability, foreign investors have reduced their investments in Turkey over the past week. According to the finance minister, recent capital outflows were driven by foreigners rather than residents.

Germany Reforms Constitutionally-Mandated Debt Brake (2025)

The impending approval of a historic reform to Germany's debt rules will allow for increased investment and higher defense spending, which will help raise medium-term economic growth in both Germany and the euro area. On March 18, the lower house of Germany's parliament, the Bundestag, approved a constitutional amendment to reform the country's so-called ''debt brake,'' a constitutional rule introduced in 2009 that restricts government borrowing, limits the structural deficit to 0.35% of GDP and requires states to run a balanced budget. The reform exempts defense expenditures exceeding 1% of GDP from the debt brake, thereby removing legal limits to German military spending. It also allows the next parliament to establish a EUR 500 billion special purpose fund to finance spending for civil protection, intelligence services and military aid for Ukraine, as well as infrastructure and climate-related investments. Additionally, the reform allows German states to run a deficit of 0.35% of GDP (up from the current zero deficit cap), but many states would need to reform their own legislation to take advantage of the loosened borrowing limits. The constitutional amendment will now go to a vote in the Bundesrat (the upper house of parliament) on March 21, where it is widely expected to pass. 

> The debt brake reform passed in the Bundestag with 512 votes to 206, thanks to the backing of incoming Chancellor Fredrich Merz's conservative Christian Democratic Union (CDU) and its prospective coalition partner, the center-left Social Democratic Party, along with the environmentalist Greens. In the Bundesrat, these parties only control 41 of the chamber's 69 seats, leaving them six votes shy of the two-thirds majority needed to pass constitutional amendments. However, the CDU's Bavarian sister party, the Christian Social Union (CSU), which controls six votes in the Bundesrat, has signaled its firm intent to support the debt brake reform when it goes to a vote in the upper house, despite the fact that the CSU's coalition partner in Bavaria, the Free Voters, remain skeptical about the reform.

> The debt brake has significantly constrained German government borrowing over the past 16 years, which has, in turn, prevented necessary infrastructure investment and a more proactive fiscal policy to support Germany's economic growth. Through its proposed reform, Merz's incoming government is also seeking to increase defense spending in response to U.S. President Donald Trump's March 4 decision to suspend all military aid to Ukraine and the broader uncertainty regarding future U.S. support for German (and European) security. 

A sharp increase in government spending will help boost Germany's medium-term economic growth, upgrade its defense-industrial base, lift asset prices and support the rotation out of the U.S. into European stocks in the context of an increasingly uncertain U.S. economic outlook and unpredictable U.S. policymaking. Germany's economic performance has been very disappointing following the energy price shock in the wake of the 2022 Russian-Ukrainian war and in the context of chronic underinvestment. A large-scale, investment-focused fiscal stimulus could boost economic growth over the medium term, though the precise growth effect will hinge on how well the money is spent and on what. That said, even if the money is spent poorly, it will help boost economic growth and revive economic confidence. Higher German economic growth will also help support eurozone growth, particularly in countries that supply the German market (like France and Poland) or are deeply integrated into German supply chains (like the Czech Republic, Hungary and Slovakia). Additionally, a stronger German economy will make Europe a more attractive investment location, continued regulatory impediments notwithstanding. 

> The International Monetary Fund has repeatedly highlighted the need for Germany to raise public and infrastructure investment. German real GDP growth is estimated to have averaged a mere 0.2% annually in 2020-24. High energy prices and increasing competition have hit Germany's chemicals and auto sectors particularly hard.

> Since the beginning of the year, European and German asset prices have increased as markets became convinced the debt brake reform will happen. Over the medium term, European asset prices and especially German and European defense sector stocks will continue to benefit from a successful reform of the debt brake. Banking stocks will also benefit from higher growth and higher interest rates. This will support a rotation of investors from the United States into European equities, not least due to U.S. political and economic uncertainty under the Trump administration.

Due to significantly higher German borrowing, euro-area interest rates will increase over the medium term, which will increase nominal debt servicing costs for all euro-area sovereigns, even as other economies stand to benefit from higher German economic growth. German debt is set to increase significantly from around 62% to 90% of GDP over the next ten years, according to some private-sector estimates, though any projections depend on how rapidly defense expenditure can and will be ramped up following the debt brake reform. This will not represent a financial problem for Germany due to its history of fiscal discipline, which has characterized policymaking since the establishment of the Federal Republic in 1949. However, higher European interest rates, combined with a larger fiscal deficit in other eurozone countries, will still further increase German debt levels. These developments could also renew concerns about fiscal sustainability in some of the more highly indebted euro area countries in the coming years, particularly those planning to increase defense spending in the context of more accommodating euro area fiscal rules.

Argentina’s Milei Signs Decree To Clear the Way for a New IMF Deal (2025)

A new IMF deal would improve Argentina’s short- and medium-term economic and financial outlook in the face of limited international financial market access and negative foreign exchange reserves, and open the door to the lifting of capital controls. On March 11, the Argentinian government issued a presidential decree allowing it to enter an agreement with the International Monetary Fund, or IMF, on a new adjustment program to replace the one that expired in December 2024. The Argentinian government and the IMF have been working on a new stand-by agreement to support Argentina’s economic and financial reform in the past few months, following the expiry of the previous arrangement. In 2021, Argentina passed a law that requires the government to put any IMF program to a vote for approval in the legislature. Concerned that opposition lawmakers might vote against a new program, the administration of Argentine President Javier Milei instead decided to issue an executive order, which can only be overruled by a two-thirds majority in Congress -- thereby minimizing the risk of any IMF deal being held up by the legislature. 

> Argentina’s previous IMF program, which was approved by the legislature, was signed in 2022 and expired at the end of 2024. The program provided $44 billion in gross financing, but it failed to help Argentina overcome its chronic macroeconomic imbalances.

Argentina is seeking to secure a new IMF deal as it faces significant external financing requirements and limited access to international capital markets. Argentina has large external debt repayments coming due starting in 2025, as well as substantial repayments of dollar-denominated domestic debt. Its central bank’s usable foreign currency reserves are also much smaller than the $28 billion foreign currency assets it has sitting on its balance sheet. The IMF estimates Argentina’s total external debt service stands at $12.8 billion, but this does not include the servicing of domestic dollar-denominated or -indexed debt, such as the liabilities of the central government vis-a-vis the central bank. Foreign currency bond repayments, meaning debt service excluding bilateral and multilateral creditors, will amount to $9 billion in 2025, in addition to another $5 billion in payments by Argentina’s provinces and the central bank. At the same time, the IMF wants to ensure that Buenos Aires can repay the large debts it owes to the institution. The Fund also wants to support the Milei government’s significant efforts to stabilize and reform the Argentinian economy, including a massive fiscal adjustment that has helped reduce inflation. However, the government’s exchange rate policy, which is aimed at limiting and reducing inflation until Argentina’s October legislative elections, has likely become a point of contention in negotiations on a new IMF program. A combination of continued elevated inflation and slow currency depreciation has translated into an overvalued exchange rate that limits Argentina’s ability to earn the foreign currency necessary to service its external debt. The IMF is skeptical that this approach is sustainable and will be reluctant to provide financing in the context of significant external financing requirements and significant concerns about the sustainability of the current exchange rate policy and large external financing needs without Argentina firmly committing to devaluing its currency and shifting toward more flexible exchange rate management. But the government remains reluctant to adjust the exchange rate for fear of increasing inflation before the elections. Nonetheless, Buenos Aires and the IMF will likely ultimately reach a compromise on the issue, as both sides are keen to reach an agreement.

> President Milei came to office in December 2023 and has since implemented a forceful fiscal adjustment and broader structural reforms. As a result of these policies, Argentina’s inflation rate fell from 26% month-on-month in December 2023 to 2.2% in January 2025. However, the government has allowed the real exchange rate to appreciate in the context of still-rising consumer prices (albeit at a much slower rate) and a slowly depreciating nominal exchange rate, as Buenos Aires tries to limit domestic price pressure and increase economic confidence ahead of the October elections.

> As of January 2025, the central bank’s gross foreign reserves stood at $23 billion, down from $38 billion in January 2023. However, net usable reserves were much lower, which is what puts the current exchange rate policy regime at risk, as a weak central bank balance sheet would lead to a substantial depreciation and reignite concerns about inflation, at least in the short term, while maintaining the current policy that translates into an overvalued exchange rate will not be sustainable in the longer term.

An agreement would greatly improve Argentina’s near- and medium-term external financing outlook and make it easier for Buenos Aires to lift capital controls. Milei’s decision to issue the decree indicates his administration may be close to reaching a new agreement with the Fund, which would make Argentina’s near- and medium-term financial risks much more manageable, even if the risk of a significant currency adjustment before the end of the year will remain high. While neither the exact loan amount nor the IMF’s demands regarding Argentina’s exchange rate policy are currently known, Reuters reported that the financing modalities of the new program involve a repayment period for IMF loans of 10 years, including a grace period of 4.5 years. This grace period would help Argentina reduce short-term external financing needs. Argentina’s treasury would then use any IMF disbursements before the end of the grace period to repay its dollar liabilities with the central bank, thus helping to strengthen the bank’s international liquidity position, which is highly desirable in case the IMF insists on exchange rate flexibility. A new IMF program would likely also unlock further funding from other international financial institutions, and would improve the prospect of Argentina tapping international bond markets or receiving more favorable conditions from international banks willing to refinance parts of Argentina’s external debt. Moreover, an IMF deal would open the door to the lifting of capital controls. The Milei administration remains keen on lifting these controls to attract moreforeign investment, but it is also mindful of the subsequent risk of greater capital outflows and theimpact this would have on the peso’s value andArgentina's confidence in the currency, thereby heightening inflationary pressures. A new IMF program would help mitigate these risks by shoring up investor confidence in the peso and ensuring Argentina’s central bank can prevent an overshooting of the exchange rate to the downside.

> Removing capital controls will require the Milei administration to devalue the Argentine peso; otherwise, an overvalued exchange would lead to massive foreign exchange losses and a sharp depreciation of the exchange rate once residents can freely sell pesos for U.S. dollars.

> Argentina owes the IMF $44 billion, which adds to the country’s external financing requirements in the context of limited international financial market access and low levels of central bank foreign exchange rate reserves. The grace period in the new program would help push out IMF loan amortization and, in turn, improve the country’s short- and medium-term external financial outlook.

> Any IMF loans that Argentina receives over the next 4.5 years will help improve Argentina’s international liquidity position and the central bank’s foreign exchange position. Refinancing IMF loans is also key to further adjusting Argentina’s foreign exchange and capital control policies.

Global Minimum Tax, Digital Service Taxes and America First Foreign Economic Policy (2025)

The new U.S. administration pulled out of a landmark 2021 OECD international tax agreement and ordered the Treasury and the United States Trade Representative to investigate whether other countries impose extra-territorial or discriminatory taxes on U.S. companies, which could open the door to trade retaliation and punitive tax measures targeting foreign companies and individuals located in the United States as well as lead to broader conflict over the taxation of U.S. tech companies. On January 20, the new U.S. administration notified the OECD that any commitments made by the Biden administration will have no force within the United States. Under the OECD agreement, 140 countries committed to imposing a global minimum tax on large multi-national companies (MNCs). The administration also directed the Treasury and the United States Trade Representative to investigate the tax policies of other countries in view of extraterritoriality and discrimination and to present the president with a list of options of how to respond within 60 days. The Treasury and the USTR are to publish its findings within 60 days. If they find countries to be discriminating U.S. companies, the administration will be able to put raise taxes on them or take retaliatory trade measures. 

> The 2021 OECD-sponsored international tax agreement comprises 140 countries and aims among other things to limit inter-jurisdictional tax competition and the erosion of national tax bases by limiting the ability of multi-national companies (MNCs) to shift profits to low tax jurisdictions. 

> The agreement consists of two pillars. Pillar 1, applying to about 100 of the world’s largest MNCs, aims to reallocate a share of MNC-related taxes between jurisdictions. Pillar 1 negotiation have proven contentious and have not been finalized. The Joint Committee on Taxation estimates that if Pillar 1 were implemented the US would lose $ 1.5 billion in revenue per year and that 70% of reallocated taxes would come from US MNCs. Pillar 2 establishes a global minimum tax of 15 percent. The minimum tax allows for the imposition of top-up taxes in case the tax of the jurisdiction where the MNC is headquartered has a corporate tax of less than 15 percent. The o implementation of Pillar 2 was estimated to raise more than $ 200 billion in additional revenue.

> Existing domestic legislation (Section 891 of the Internal Revenue Code) allows the Trump administration to double taxes on companies and citizens of countries that are found to impose discriminatory taxes on companies. The legislation has never been invoked, no regulation pertaining to it has been promulgated, and it is not clear how the provision would apply in practice. 

If Treasury finds a country to be imposing discriminatory or extra-territorial taxes on U.S. persons, the executive will be able to double the tax rates for affected foreign companies and individuals without requiring congressional approval, and the Treasury and USTR may find provisions pertaining to the 15% global minimum tax as well as national digital services to discriminate against U.S companies. The OECD agreement was meant to resolve the conflict national digital services taxes. The conflict is a straightforward distributional conflict between the United States and other countries. The failure to finalize the tax agreement, especially Pillar 1, will also lead countries to introduce digital services taxes, which are strongly opposed by the U.S. But failure of Pillar 1 may lead more countries to introduce digital services taxes and lead to increased tensions with United States. Faced with the prospect of much higher U.S. taxes, most countries may find the costs of U.S. unfriendly measures outweigh the benefit of maintaining “discriminatory” taxes, including global minimum and digital services taxes. Smaller countries will find it difficult not to make substantial compromises. Even larger economies, like the EU, have already signaled their willingness to start talks with Washington. There may be room for compromise given that current US corporate tax regime in terms of rates is not way out of line with the 15 percent minimum tax, even if a different U.S. approach to the treatment of R&D and the grouping of international income into a blended rate might force U.S. MNCs to pay a top-up levy under the so-called undertaxed profit rule.

> In December 2022, the European Union unanimously moved forward to implement this country- by-country minimum tax by issuing a Council Directive (Pillar 2). Most EU countries with 12 or more MNCs enacted the Pillar 2 related income inclusion provision in 2024 and the undertaxed profit rule in 2025. Smaller EU countries were allowed to defer their implementation by up to 6 years. 

> In 2019 and 2020, USTRA Section 301 investigations found that digital taxes imposed by Austria, France, India, Italy, Spain and Turkey and US were discriminatory, but both the Trump and Biden administration suspended retaliatory trade measures following their commitment to remove the taxes following the successful conclusion of Pillar 1 negotiations.

> Another 140 countries agreed to a moratorium of new digital services taxes. This agreement has now lapsed. Relatedly, the WTO moratorium on customs duty on electronic transmissions was extended in March 2024 for another two years.

The investigation into the discriminatory tax treatment of U.S. companies overseas will further increase economic uncertainty and has the potential to lead the U.S. to introduce punitive tax rates on foreign companies located in the United States as well as retaliatory tariffs on countries found to impose a 15% percent minimum tax and/ or national digital services taxes. As many MNCs and especially tech MNCs are American, the introduction of a global 15 percent tax would make it more difficult for MNCs to shift their profits to low-tax jurisdiction. The minimum tax also imposes a higher tax burden if the corporate tax rate in the home country is lower than 15 percent. Under Pillar 2, large companies pay more taxes in countries where they have customers and less in countries where headquartered if the corporate minimum tax in their home country is lower than 15 percent. From an U.S. perspective, higher foreign taxes mean less income for shareholder of US companies. It may also lead to lower taxes to the extent that higher foreign taxes translate into domestic tax credits. 

> The tax agreement risks increasing taxes on U.S. multi-nationals and to reallocate tax revenue away from the United States. Conflict over digital services taxes are a long-standing source of tensions between the United States and the rest of the world and will be revived with force if Treasury or USTRA find them to be discriminatory. Targeted countries could then be faced with tax and tariff threats, which could prove highly disruptive to their economic relationship with the United States.

> Previous U.S. administrations opposed the introduction of national digital taxes. About half of EU members have announced, proposed or enacted digital services taxes. Trump administration launched Section 301 investigations. The first Trump administration launched a Section 301 investigation and threatened tariffs in response, which led to a moratorium pending the conclusion of Pillar 1 talks. The USTR threatened to impose a 25% tariff on $1.3 billion worth of goods. 

> The U.S. Global Intangible Low-Taxed Income (GILTI) tax imposes a minimum rate of 10.5 percent on a globally blended basis. However, because this tax rate is lower than the Pillar 2 minimum tax, it does not conform to the Pillar 2 rules and would subject many US MNCs to the so-called UTPRs abroad, forcing US multinationals to pay higher taxes in foreign jurisdictions under Pillar 2. 

The change of the U.S. stance on international taxation mirrors the greater reliance of unilateral measures to exploit economic dependence of other countries on the United States, and creates an additional source of economic friction. First, the U.S. exiting the OECD agreement and threatening to impose discriminatory taxes on selected countries will further undermine multilateralism and reflects a broader shift toward greater unilateralism under the Trump administration aimed at leveraging U.S. bargaining power. Second, by abandoning the global minimum corporate tax and, depending on the outcome of the Treasury investigations, economically weaker countries may be forced to abandon or scale back national digital taxes as well as a 15 percent minimum corporate tax, which will lead to a further erosion of their tax or lead them to forego revenue they would have received under the OECD agreement. This is particularly painful at time when both borrowing, and debt are high across advanced, emerging and developing economies. 

> The OECD estimates that the implementation of Pillar 2 would raise global tax revenue by $ 200 billion. The bulk of the additional taxes would go to advanced economies. But emerging and developing would nevertheless have received additional government income in the form. If these countries decide to abandon the 15% minimum tax and/ or digital taxes in response to U.S. pressure, they will forego much needed revenue in the face of continued and increasing fiscal and debt challenges. Every dollar counts.