Turmoil in Turkey: Lira’s losses risk repeating the 2008 Crisis
Liam Sheasby, News Editor
13 Aug 2018, 5:12 p.m.
The value of the Turkish Lira plunged on Friday, losing 23% of its value in a day. The currency sits precariously at 6.93 Lira per Dollar or 1 Lira for every 14 Cents. Strains on the economy, including trade tariff pressure from President Trump, has severely hampered the Turkish currency, with members of the public rapidly turning to investment safe havens such as gold.
The Turkish Central Bank acted over the weekend to boost the Lira by providing liquidity, as well as cutting the required amount of Lira and foreign currencies that banks must keep in reserve. This brought some relief with a slight rise in the currency’s value this morning, but the Lira has lost over 30% of its value against the US Dollar since the year began. Travel agents Thomas Cook today reported a 63% increase in bookings for holidays in Turkey from the UK, with £100 buying 697 Lira – 237 Lira more than this time last year.
The gold price climbed from £945 to £953 per ounce on Friday, buoyed by the news from Turkey, but demand has since slowed again and the gold price has dropped below £938 an ounce currently. Gold’s safe haven status is obvious, but the US Dollar’s current strength is making it the more attractive option of the two, with gold instead competing against the Japanese Yen and Swiss Franc as second-choice.
Speaking to Nasdaq, Saxo Bank analyst Ole Hansen said: "There is a battle going on between the strengthening dollar and some safe-haven demand emerging from the contagion risk following the collapse of the lira."
Turkey’s economy has been struggling throughout 2018. A combination of a stronger Dollar, fiscal stimulus projects in the country, rising inflation, and a significant current account deficit (trade deficit plus other fiscal deficits) has steadily been diminishing the worth of the Lira. This has now been compounded further by Donald Trump’s decision to implement trade tariffs against Turkey.
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
President Erdogan is unusually involved in the Central Bank’s policy decisions compared to other leaders. This puts some investors off, and his rhetoric that Turks should be changing gold and other hard currency into Lira as part of a battle between Turkey and “enemies” is seen as counter-intuitive given the rapidly decreasing value of the Lira. Economists argue that raising interest rates would restore faith in the Lira, but again President Erdogan opposes such a move, not wanting to impact on borrowing rates.
The Lira isn’t the only currency to struggle at present, with Russia’s Rouble at a two-year low and the Pound and Euro both at the weakest they’ve been in a year. The US/China trade war is the main driving force behind these currency weaknesses, but the latest news about Turkey isn’t helping matters. In comparison, the US Dollar has hit a 13-month high, with consumer prices and inflation both continuing to rise month to month. Investors are sticking with the Dollar as they expect a third interest rate rise this year from the Federal Reserve to come next month, bolstering the Dollar as a result.
The European Central Bank is ‘concerned’ according to the Financial Times, with major banks in key nations having loaned money to Turkey. It is believed that $83.3 billion has come from Spanish banks, $38.4 billion from French, and $17 billion from Italian. Following the FT’s article, shares in UniCredit (Italy), BNP Paribas (France), and BBVA (Spain) all fell by 3% on Friday morning.
Gregan Anderson, a macroeconomic strategist at the brokerage Bulltick LLC, spoke to the Reuters news agency about the impact of Turkey’s currency crash and a “domino effect throughout Europe as people begin to pull out of those banks and into the US. That’s why we’ve seen a spike in the Dollar”.
Prophecy becomes reality
Such a collapse in Turkey isn’t entirely a surprise however. Market analyst Tim Lee, interviewed here in the New York Times, highlighted the problem seven years ago. In his mind the threat came from cheap foreign debt being taken on by Turkish companies (particularly real estate developers) - debt which is now choking Turkey’s economy. It was a similar over-selling of mortgages running up to 2008 and the accrued debt there which caused the global recession, so there’s a strong risk of a knock-on effect causing equal or perhaps worse setbacks here. Mr Lee estimated then it would require around $100 billion to bail Turkey out, but given the rapid devaluation of the Lira this figure is likely to be more, and who will foot the bill should it come to that?
Lee saved his strongest message for last: “It won’t be a banking crisis this time around — it will be a financial market crisis. And I am very confident that it will happen.”