Turkey Financial Crisis | Latest Burning Issue

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TURKISH CURRENCY AND DEBT CRISIS, 2018

The Turkish currency and debt crisis of 2018 is an ongoing financial crisis in Turkey with international repercussions due to financial contagion. It is characterized by the Turkish lira (TRY) plunging in value, high inflation, rising borrowing costs, and correspondingly rising loan defaults. Contagion – contamination, infection

CURRENT ACCOUNT DEFICIT AND FOREIGNCURRENCY DEBT

Since Recep Tayyip Erdoğan assumed control of the government, Turkey has been running huge and growing current account deficits, $33.1 billion in 2016 and $47.3 billion in 2017, climbing to US$7.1 billion in the month of January 2018 with the rolling 12-month deficit rising to $51.6 billion, one of the largest current account deficits in the world

THE PROBLEM

The economy has relied on capital inflows to fund private-sector excess, with Turkey’s banks and big firms borrowing heavily, often in foreign currencies. Under these conditions, Turkey must find approximately $200 billion a year to fund its wide current account deficit and maturing debt, while being always at risk of inflows drying up; the state has gross foreign currency reserves of just $85 billion.

AUGUST 2018 DATA

WHAT CAUSED THIS NOSEDIVE?

For a start, investors are worried that Turkish companies that borrowed heavily to profit from a construction boom may struggle to repay loans in dollars and euros, as the weakened lira means there is now more to pay back.

WORRIES

The stock market has also fallen 17%, while government borrowing costs have risen to 18% a year
Meanwhile, inflation in Turkey has hit 15%.

BAD RELATIONS WITH US

Then there are Turkey’s worsening relations with the US. Donald Trump’s administration hit its justice and interior ministers with sanctions last week, a reaction to the detention of American pastor Andrew Brunson, who has has been held for nearly two years over alleged links to political groups.

BAD RELATIONS WITH US

The US dealt Turkey and the lira a further blow in a tweet on Friday, in which Mr Trump said he had approved the doubling of tariffs on Turkish steel and aluminium.

SHIFTING ALLEGIANCES?

In his recent speech Sunday Erdogan, repeated his accusation that the imposition of further tariffs by the US is tantamount to “economic warfare,” and warned that the US stance could see a geopolitical shift in the NATO member’s alliances.
Referencing Trump’s imposition of tariffs on a host of global trading partners, including the EU, Canada and China, Erdogan said that it could force the country “towards new markets and new alliances.”

TOO MUCH CONTROL ON CENTRAL BANKS

In many nations, including the US and EU states, the central bank is independent of government and no one can tell it what to do with interest rates. This means it can keep control of inflation by raising them when necessary.