August 13, 2018 11.35AM / By
The slump in the Turkish lira in recent weeks is quite extraordinary
It has lost a third of its value against the US dollar in a week (!) as investors have grown more anxious about the country’s financial health, its diplomatic row with the US, and its central bank’s reluctance (or inability) to raise borrowing costs to stem the crisis.
The lira vs the US dollar - This chart shows how the crisis could spread to Europe, if Turkish banks find themselves struggling to repay dollar-denominated debts.
Fiona Cinoctta, senior market analyst at City Index, reckons the Turkish government only has a few days to stem the crisis.
She warns that the slump in the lira could prompt some companies to default on their US dollar loans, triggering a domino effect:
“The lira had already declined 20% against the dollar on Friday on a mixture of domestic financial problems and increasing friction with the US and the decline continued this morning with the Turkish currency plumbing new lows.
For the time being Turkey’s financial crisis looks localised but the country’s central bank has perhaps only days to stop the decline of the currency before the lira’s freefall results in loan defaults, starts seriously affecting the country’s financial system and potentially starts spilling over onto European banks.
Into this domestically induced financial slide comes the deteriorating relationship between Turkey and the US. The US is holding it against Turkey that it is refusing to support US sanctions against Iran and that is not releasing an American pastor who is being held on terrorism charges. The US response was fairly clear cut – on Friday when the lira was in freefall the US announced it would raise the tariffs on imports of Turkish steel to 50% and the tariffs take effect Monday morning.”
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“Erdoğan’s answer to the financial crisis – that his followers should do their patriotic duty and exchange rapidly appreciating US dollars for ever-more worthless Turkish lira – is laughable. indeed, it will merely add to the belief in the world’s financial markets that Turkey is being led by a man who has lost touch with reality.
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.
For Erdoğan, that means eating a huge plateful of humble pie. He is going to have to surrender to Trump over [jailed pastor Andrew] Brunson, because he is damaging the economy by continuing with a fight he cannot win. And he will need to accept that tough and unpopular measures are now inevitable to prevent a total collapse in the currency leading to hyper-inflation.”
Emerging currencies across the globe are suffering from the Turkish crisis.
The South African rand has dropped to a two-year low, while Russia’s rouble is at its lowest against the US dollar since early 2016.
India’s rupee hit a record low, with traders reporting that the country’s central bank had intervened to prevent an even steeper loss.
The Turkish lira is still sharply lower today, down 6% at 6.8 lira to the US dollar (having plunged through 7 lira in early trading).
Mike Bird (@Birdyword) wrote:
“Bloodbath in emerging market currencies this morning, led by Turkey. Central bank's attempts to reassure on liquidity lasted precisely 20 minutes. Stocks off almost across the board”. https://t.co/8VwdM0xmUl
With the US dollar strengthening, traders fear that developing economies are going to suffer capital outflows - potentially creating fresh currency crises.
Neil Wilson of Markets.com fears further pain for emerging markets:
“The dollar is the big winner in all this as investors turn away from EM. This may very well make things worse, particularly as long-dollar increasingly becomes something of a one-way trade. This dollar rally has a lot further to go and this will heap more misery on EM”.
European bank shares are leading the selloff, driven by fears that they could be dragged into the Turkish crisis. Several European financial institution, including Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas, have significant operations in Turkey.
They have borrowed in US dollars and may struggle to repay those debts unless the lira recovers. BBVA shares have fallen by 2.2%, Unicredit have lost 2% and BNP Paribas are down 1%.
On Friday, the Financial Times reported that the European Central Bank is concerned about their exposure to the Turkish crisis.
Anxiety about spillover effects from Turkey is also pinning the euro at a one-year low against the US dollar (down half a cent at $1.137 right now).
Turkey launches probe into ‘fake news’ over lira rumors
Turkish authorities have launched a crackdown on news and social media posts which are threatening confidence in the economy, according to local reports. Now, Turkish financial regulators are threatening legal action against those who make or publish “erroneous and fabricated news and statements”. Almost 350 social media accounts are under investigation, for undermining the lira’s exchange rate against the US dollar. The move comes as president Erdoğan’s office warns that there is a co-ordinated attempt to undermine the country’s economy.
Hürriyet Daily News has the details: The Chief Prosecutor’s Office in Istanbul has opened an investigation into actions threatening “economic security,” while Turkey’s financial watchdog launched a separate probe into what it described as “fake news” aiming to manipulate economy.
“An investigation has been launched according to Turkish Penal Law, Banking Law, Capital Markets Board regulations and related laws into people who displayed actions that threaten economic security through manipulative stories on media and operational social media accounts as part of the economic attacks that target the Republic of Turkey, its social peace, unity and economic security by the powers behind the  coup attempt,” the prosecutor’s office said in a statement on August 13, according to the state-run Anadolu Agency.
In a separate statement, Turkey’s Interior Ministry said that “a judicial investigation has been launched into 346 social media accounts who shared posts to provoke the rise in the dollar exchange rate.”
“MASAK started an investigation into people and institutions that spread fake news, such as those claiming that ‘the state will intervene to convert foreign exchange in accounts into Turkish lira’ and ‘it will fix dollar exchange rate’ by ditching floating rate policy, which is a main pillar of the free market,” Treasure and Finance Ministry Press Undersecretary Ali Berber said in a tweet on Aug. 13.
Q&A: Why The Turkish Lira Is In A Freefall - Should We Worry?
Turkey’s currency is in freefall, its exports face US sanctions, inflation is rising but its president is defiant. So what’s going on in the country with 80 million inhabitants that is a key Nato ally?
1. What has happened to the currency? The lira fell by one fifth against the dollar last week alone. But even before the current crisis, the lira was the world’s worst performing currency, dropping by almost 50% against the dollar in the past 12 months.
2. Why is the lira falling so fast? Turkey’s economy faces some very challenging issues. It is running a current account deficit, combined with high levels of debt in the private sector and significant foreign funding in the banking system. Inflation reached an annual rate of 15.9% in July – more than five times the average rate for wealthy nations – and government borrowing in foreign currencies has risen dangerously high. There are also fears of a bust in the construction sector after years of hectic growth, leaving the banks with mounting debts.
3. What sparked the latest rout? On Friday, the US president, Donald Trump, announced he was doubling US import tariffs on Turkish steel and aluminium. Behind the trade dispute lies a standoff over Turkey’s detention of a Christian evangelical pastor, Andrew Brunson. The pastor is facing espionage and terrorism allegations following the failed 2016 coup and his case has been taken up by religious conservatives in the US. Reports in Turkey say the US has set a deadline for Brunson’s release this week, although that has not been confirmed by Washington.
4. Isn’t this just a local problem for Turkey rather than the rest of us? Not judged by the reaction of global markets. The fallout saw European markets fall sharply, with investors worried about contagion effects, particularly on banks exposed to the Turkish currency. On Friday, the FTSE fell 75 points, while Germany’s Dax ended the day down 2%.
5. Is there going to be an IMF bailout? The IMF reckons that Turkey has the least adequate level of reserves of the major emerging market economies, which makes it vulnerable to speculative attacks. But Erdoğan has shown deep resistance to pushing up interest rates to defend the currency and quell inflation, and is likely to balk at begging for aid from the international community. Meanwhile there are concerns about political interference with the “independent” central bank, especially as the president appointed his son-in-law as finance minister.