Just published on Impakter, my take on the Turkish Lira crisis currently roiling the markets:
Turkey’s Lira crisis: Is it a strictly Turkish problem or is there a risk of contagion? The answer to that question is complex and requires taking a close look at what happened and at Erdogan’s role which is central. Including looking at his past, considering the whole arc of his career, from Istanbul mayor to autocratic president.
The Lira, weak since the start of the year, went into freefall by August 13, following two hostile American policy moves. One was sanctions hitting two Turkish government officials, the Justice and Interior ministers, on August 1. The other was a Trump tweet announcing steep tariffs on steel and aluminum on August 10:
I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!
— Donald J. Trump (@realDonaldTrump) August 10, 2018
Both moves surprised international investors. They hit an important NATO ally like Turkey that is host to a major American base and put at risk other areas of U.S.-Turkey cooperation like the war in Syria, drug fighting or anti-terrorism. They arose from a dispute over the release of an American evangelical pastor, Andrew Brunson, whose cause is championed by Vice President Pence. Turkey is accusing pastor Brunson of espionage and terrorism in relation to the failed 2016 coup attempt.
This is not the first time that Turkey is impatient with the United States. In 2017, the Turks sent seven requests for extradition of Fetullah Gullen who presently lives in the United States. A one-time Erdogan ally, he has turned into his foe. As head of FETO, he is accused of orchestrating the 2016 coup.
By August 13, at the close of markets, the Lira had lost an unprecedented total 40% of its value since January. The already fragile economy looked ready to collapse, with inflation poised to surge. On August 14, the Lira marked a short gain while the rupee collapsed further. The US continued to demand the release of pastor Brunson from house arrests but Erdogan speaking in Ankara today threatened to boycott American electronic goods: “If they have iPhones, there is Samsung on the other side, and we have our own Vestel here.”
Turkey’s Lira crisis is a currency crisis like no other, with a strange twist: The Turkish Central Bank is unwilling to face the problem head on with a raise in interest rates – the classic way to defend a currency under attack.
It seems the Central Bank is under pressure from President Erdogan not to raise rates that would hurt his voters, particularly small businessmen. Capital controls are also ruled out.
Over the weekend, Erdogan has gone a step further. He’s announced he wouldn’t accept an international bailout, something Germany had intimated might be possible if Turkey agreed to restore independence to its Central Bank.
Instead, at the time of writing (August 14), the Central Bank had only pursued relatively modest liquidity measures to buffer the Lira. Things like asking Turkish citizens to sell their dollars and buy the Lira and easing bank rules. It has vowed to provide banks with all the liquidity they need – whether it can effectively do so remains to be seen.
As a result, the Lira keeps falling with President Erdogan remaining defiant, calling it an “economic war” unleashed by America:
The Lira crisis is rippling across the world. Emerging markets are roiled, India’s rupee, the South African rand, the Argentina peso, the Russian were all hit, and Europe is threatened, starting with its weakest member, Italy, with the largest debt burden (over 130% of GDP). Some observers warn of a domino effect. Italian treasury bonds took an immediate hit, the spread with the German bonds widening again. Add to the mix major European banks excessively exposed to the Turkish Lira, particular Spanish banks.
To understand what happened, one needs to take a step back in History. Turkey has come a long way since the times of Ataturk and Erdogan at first was a positive force, until he wasn’t, as explained in this excellent video:
See the video and read the rest on Impakter, click here.