3 reasons why Turkey’s crisis matters

The economic crisis unfolding in Anatolia could have very far reaching consequences – we highlight three reasons why Turkey matters right now

1. Currency weakness

The Turkish lira has taken a battering this year. Despite a climb mid-week the currency has lost over 30% of its value against the dollar this year. In the last five years the lira has gone from 1.94 to the dollar to over 7 on Monday 13th August.

The Turkish lira has lost significant value against the dollar in 2018

Such a decline makes it hard for Turkish savers, as the value of their money declines and makes it extremely expensive for Turks to travel abroad. It also pressures investment in the Turkish economy from abroad as dealing in lira could see return values hit significantly.

As Glint Perspectives reported earlier this year, the decline in lira has seen a movement into gold as Turks rush to put their money into a safe store of value.

2. Contagion

Turkey’s troubles could spread. The decline of the Turkish lira marks a broader economic challenge, affecting markets globally. Emerging markets were hit by speculation this week, leading to other currencies falling against the dollar: The South African rand losing 7% of its value against the dollar, which also rose against the Indian rupee to 70. In Argentina interest rates rose by 5% to 45% as the Argentine peso slid for the sixth day against the dollar. “The fear is what happens in Turkey won’t stay in Turkey,” Kate Nixon, head of investment for Northern Trust’s wealth management, told the FT.

The crisis in Turkey is seen by experts as representative of the struggles of many economies with substantial dollar debts and therefore vulnerable to rises in interest rates by the US central bank – the Federal Reserve. Such rate hikes make it more expensive to pay back dollars, especially if your native currency is inflating. Such a situation raises the spectre of defaulting (not paying) on debt, something Argentina did in 2014 and before then in 2001, leading to great social unrest.

The fluctuations of the Argentine interbank interest rate

In Europe there are fears contagion from Turkey’s crisis could have serious implications for economies vulnerable to debt. “Spanish lenders are most vulnerable to the worsening currency crisis, followed by French and Italian banks,” Shweta Singh of TS Lombard told Reuters. “With Europe’s large exposure to Turkey through banking sector flows, investors are increasingly worried about the fallout as the crisis unfolds.”

In Spain, Portugal and Italy, government bond yields have risen in the wake of the Turkey crisis as investors perceive an increase in risk. Claudio Borghi, the eurosceptic economic spokesman for Italy’s power-sharing Lega party warned the European Central Bank (the ECB) that it must step in and put limits on the rise in bond yields. Italy’s 10-year bond yield is currently around 3.1%, compared to a German bond yield of approximately 0.3%. “Either the ECB will provide a guarantee or the euro will be dismantled,” said Borghi. “There is no third option.”

Messrs Trump and Erdogan in happier times

3. Politics & Trade Wars

Perhaps the most worrying issue highlighted by Turkey’s economic crisis is its political framing. President Erdogan has overseen an increasingly repressive regime, jailing journalists, targeting the free press and, since 2016’s attempted coup, cracking down on non-aligned parties both within and outside the establishment. In keeping with the strongman narrative he sought to blame his country’s economic woes on an “economic war” being waged against Turkey by the US.

Turkey’s detention of US citizen, and Turkish resident, pastor Andrew Brunson on espionage charges due to his alleged links with the Kurdistan Workers Party and the Gulenist movement, has created a spat with Washington that has seen both sides issue sanctions. President Trump has issued tariffs of 50% on Turkish steel and 20% on Turkish aluminium. In response Erdogan has announced tariffs of 140% on US alcohol and 120% on US cars.

The Kilis refugee camp operated by Turkey near the Syrian border

While tariffs are seen by Washington and Ankara as instrumental in pursuing confrontational policies, they are not economically beneficial. Further, the rise in prices experienced in Turkey could be compounded by a further depreciation of the lira. If a rational diplomatic conclusion is not reached this could reinforce the binary view held by the Erdogan regime, scaring investors, undermining confidence and sending Turkey’s economic crisis into a tailspin.

More than 3.5 million Syrians have sought refuge in Turkey, a state acting as a literal and metaphorical bridge between Europe and the Middle East. At a time of great unrest across both regions, economically, socially and politically, a crisis in Turkey is systemic in nature.

Pictured top: Turkish President Recep Tayyip Erdogan