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1. Turkey is in the throes of a full-blown currency crisis, with the Turkish lira losing
nearly 45 percent of its value since the start of the year. The currency crisis
threatens to plunge the world's 18th-largest economy into a financial crisis and
trigger contagion in emerging markets and Europe.
2. Turkey has traditionally suffered from a large current account deficit. This
difference between import and export of goods and services has been filled
through external borrowing in foreign currency. A decade of easy money and low
interest rates in the United States and EU following the 2008 financial crisis led to
investors searching for higher yields to emerging markets like Turkey.
3. The external funds entered the Turkish economy to finance deficits, massive
government spending and company borrowing. Credit-fueled growth helped the
Turkish economy grow and boosted the government’s popularity through
increased consumption and major construction projects. Here, road paint reads:
"Slow down."
4. Reducing exposure to emerging markets
Investors have pulled back money from emerging markets in recent months as
the US Federal Reserve has steadily raised interest rates and is cutting back on
easy money policies in response to a robust American economy. This has
caused the dollar to increase, the lira to fall, and Turkish bond yields to rise.
5. Loss of confidence in Erdogan's strong hand
The pressure on Turkey is reflective of broader trends in emerging markets,
although the lira is by far the worst performer. That's because investors have lost
confidence in management of the economy under President Recep Tayyip
Erdogan, who believes in unorthodox economic policy, demands low interest
rates and constantly assails "the interest rate lobby." Inflation is at 16 percent a
6. Trump's tweet shakes markets
On August 10, US President Donald Trump announced higher tariffs on Turkish imports
of steel and aluminum. The tariffs themselves are minor and impact around $1 billion
(€875 million) in trade, but they weighed on market confidence in the vulnerable Turkish
economy. Even more, Trump’s direct reference to the Turkish lira sent the currency
7. Frenemies
The imprisonment of US pastor Andrew Brunson has weighed heavily on relations,
leading to a series of escalations. Ties between the two NATO allies have also
nosedived over US support for Syrian Kurdish forces, Ankara's plans to buy a Russian
missile system and Turkey's demand that Washington extradite US-based Islamic cleric
Fethullah Gulen, whom Erdogan blames for the failed July 2016 coup bid.
8. One man show
Poor relations between Washington and Ankara have added to Turkey's economic
woes, but given broader fundamentals it is only a proximate cause of the market
mayhem. More than 30 percent of the lira’s loss has come since June, when Erdogan
took over the office with new sweeping powers. Erdogan's authoritarian hand has
distanced the country from traditional Western allies and hit confidence.
9. Albayrak: the son-in-law
After winning a June election, Erdogan spooked markets when he tightened his control
over the central bank. Instead of appointing technocrats, Erdogan appointed his son-inlaw Berat Albayrak (pictured) to lead the newly empowered Finance Ministry. This has
raised concerns over the central bank's independence given the president’s repeated
statements against raising interest rates.
10. 'Economic war'
Erdogan has not inspired confidence in responding to the lira meltdown. He speaks of
"economic war" and a "campaign" waged by external powers designed to weaken
Turkey. Instead of taking drastic action to shore up confidence, such as raising interest
rates or going to the International Monetary Fund (IMF), the government is couching
itself in nationalistic rhetoric of sacrifice.
it is a relatively big country, with a population of 80 million and an economy four times
as big as neighbouring Greece. Turkey’s geopolitical significance extends beyond the
fact that it straddles Europe and Asia. As a member of Nato, it has traditionally been
seen as part of the west’s defence against Russian expansionism. It is also currently the
home to 3 million Syrian refugees, many of whom would like to be living in the European
Many emerging market economies borrowed heavily in dollars when American interest
rates were at rock-bottom levels. The result was credit-driven growth, which starts to
look fragile when – as now – the Federal Reserve is raising interest ratesand the dollar
is strengthening.
Erdoğan is one of the world’s current crop of self-styled strongmen leaders but has the
misfortune to come up against someone who is a lot stronger than he is. Relations
between Turkey and the US are not good. The White House is unhappy that Erdoğan
has put in an order with Vladimir Putin to buy Russian rather than American missiles.
When Donald Trump announced economic sanctions against Iran last week, Erdoğan
pointedly refused to take part. And, so far, Turkey has refused to release an American
pastor, Andrew Brunson, held on disputed terrorism charges.
Erdoğan has insisted that he will not be browbeaten into submission but has few
realistic options. To be sure, Turkey can seek to put pressure on Trump by saying that it
will quit Nato and forge closer ties with Russia. Erdoğan could warn the EU that it will
face a new inflow of migrants unless it intervenes on his behalf.
It is clear what needs to happen. Turkey has to tackle the three causes of its current
predicament: an overheating economy; Erdoğan’s attempts since his re-election in June
to prevent the central bank from taking the necessary action to deal with rising prices;
and the stand-off with the US
Judging by his actions so far, Erdoğan’s next move will be to impose capital controls.
However, as Paul Greer of Fidelity International notes, Turkey is a relatively open
economy and requires a large amount of finance from overseas. Capital controls would
not work on their own and would need to be supplemented by a rescue package from
the International Monetary Fund.
It’s either that, though, or a display of shock and awe from the central bank. Turkey is
running out of options and running out of time. And that should be a concern for all of
Interest rates are already at 17.75%, but with inflation poised to go to 20% over the
coming months, are nowhere near high enough to put a floor under the lira.
Holiday company Thomas Cook has seen a 63% rise in bookings to Turkey,while TUI
said it was their third most popular destination meaning it was "well and truly back on
the map as a top summer holiday location".
“There is a bit of overlap between corporate and government debt. A lot of the corporate
debt is subject to a government guarantee, so the government has to pay if a
corporation defaults,” Kirkegaard told Newsweek. “The Central Bank says there’s $130
billion in corporate debt, short-term rollover in the next 12 months. The number of
corporations taking advantage of the government guarantee has been rising.”
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