On August 13th, Turkey’s lira fell down an all-time low. The Turkish lira has been rapidly losing value against the US dollar after a diplomatic fall out with US President Donald Trump.
On August 10th, the lira surpassed the Argentinian peso as the world’s worst performing currency in 2018, having fallen more than 45%.
Turkish President Recep Tayyip Erdogan attempt to tackle the crisis has only made things worse, he blamed the plummet on the economic war with the US, called for citizens to trade gold and USD for lira, and even referencing God.
The collapse of the Turkish lira, however, carries big risks for Asia and Europe, where equity prices of banks exposed to Turkish debt went down on August 10th. Banks in Spain, Italy and France are most at risk of contagion, as well as emerging markets such as Argentina and South Africa which are exposed to Turkish debt, according to analysts, cited by The Express.
In a response to the crisis, Turkish Bank Garanti has blocked customers from opening new foreign exchange positions, making it harder for people to sell lira for USD, pounds and euros.
As of the morning of August 13th, analysts, cited by the Express, have issued a crisis warning. Chris Weston, of online trading firm IG Market in Melbourne, warned global markets would be on edge as investors tried to assess the impact of the crisis on European banks which have lent money to Turkey. The European Union’s financial watchdog has expressed concern about EU financial exposures to Turkey. And so, if it is a concern for this institution, then it should be for traders too. Turkey’s massive pile of corporate debt denominated in foreign currencies, but a rapidly sliding currency – and inflation that’s threatening to go exponential – is a toxic combination, he said.”
On the same morning, Turkish Financial Minister and Erdogan’s son-in-law Berat Albayrak said he had prepared an action plan to deal with the crisis. At the same time, a spokesman of the Istanbul prosecutor’s office announced that the prosecution had launched an investigation into individuals suspected in organizing actions against Turkey’s economic security. According to the announcement Turkey is under an economic attack and the prosecutor’s office will take action against all written and visual news as well as social media accounts which it deemed to serve towards the purpose of this attack.
The plummeting of the lira has sparked a global sell off in the emerging markets. The Express cites investors who fear that the sell off may have a ripple effect in the global financial markets, with the euro, South African rand and Mexican peso already taking a hit from the lira. The lira pared some of its losses after Turkey’s central bank said it had lowered reserve requirement ratios for banks. It also said it would provide whatever liquidity banks needed and take all necessary measures to maintain financial stability.
Also, on August 13th, the Turkish interior ministry announced that it is taking “necessary legal measures” against social media statements that create a negative perception of Turkey’s economy. According to the ministry, 346 social media accounts that posted comments about the weakening of the lira “in a provocative way” have been identified since August 7 and legal action has been launched.
A Presidential spokesman, on the same day, announced that the Turkish economy is strong and that nobody should pay attention to “speculation.” He further said that the Treasury, Central bank and Banking watchdog were all taking the necessary steps to rectify the situation.
During a speech to ambassadors in Ankara, Turkish Foreign Minister Mevlut Cavusoglu said his country had done enough to repair its ties with the US and accused Washington of acting contrary to their alliance regarding fundamental security issues. He also said that the US should not threaten Turkey if it expects to achieve any results.
On August 13th, The Turkish Central Bank launched its economy-stability plan. It promised to provide “all the liquidity the banks need,” in order to ensure financial stability. The bank’s statement said the following: “the central bank will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary.”
However, there are concerns that the central bank is not independent, with Erdogan keeping interests low, calling high interest rates an instrument of exploitation and calling himself “the enemy of interest rates.” The concerns regarding the central bank’s independency are also reinforced by Erdogan appointing his son-in-law as the Finance Minister.
Turkey has, in recent years, become one of the fastest-growing economies in the world, in the second half of 2018 they reported a 7.22% growth in gross domestic product. However, this expansion was fueled by foreign-currency debt. According to analysts, cited by CNBC, while other countries were recovering from the crisis by their respective banks pumping money to stimulate the economy, Turkish banks and companies were going into USD debt.
On July 26th, the Trump administration threatened to impose heavy sanctions if Andrew Brunson, a jailed pastor, is not released. The deadline, according to Erdogan was August 8th. Al Jazeera cited a White House official who claimed that there was no deadline sent, however that the US expected Brunson to return to the US a long time ago.
In response to US sanctions, on August 10th, Erdogan warned Washington that it should stop viewing Turkey as a lesser partner or “come to terms with the fact that Turkey has alternatives.” On August 12th, the Turkish president said: “Our response to the person who wages a trade war against the whole world, including our country, is to head towards new markets, new co-operation and new alliances.” Thus, Turkey’s crisis and the rapidly deteriorating relationship between Ankara and Washington is quite possibly leading Turkey to partnerships with Russia.