"Bloodbath ! " ..... "Contagion ! "..... It would be fair to say that so far Tur
ref :- All Financial Media, Everywhere.
No apologies for returning to familiar ground ..... it's impossible to look beyond Turkey this morning. The world's attention is firmly on Ankara , and we may very well be at a seminal moment not just for financial markets but also for the strategically crucial geopolitics of the region. When people start saying that it feels rather like the start of the Asian Crisis of twenty years ago or so, as some commentators are this morning, it's probably worth keeping a pretty close eye on unfolding events.
So what's going on ? Well, one year ago, the US Dollar / Turkish Lira (USD / TRY) exchange rate was about 3.50 . One month ago it was 4.85, and one week ago it was 5.16. On Friday's close a dollar would get you 6.40 Turkish Lira, and this morning ....? It's been through 7.00 and as we write it trades at 6.87. Turkey's Borsa equity index is off nearly 5% today, and the 10yr bond yield at one point traded above 22%, up nearly another 200 basis points from Friday. This is a serious run on Turkish assets that threatens to become a rout ..... and to affect the assets of other nations across the globe.
It's probably worth reminding ourselves of how we got here ..... One could reasonably sum up the economic policy of autocratic strongman President Tayyip Erdogan as "Growth At All Costs". A bit of healthy growth is a good thing of course, but it's the "at all costs" bit that is panicking financial markets. Last year's 7% growth in GDP, and policy measures put in place to attempt to maintain such a rate, have very predictably resulted in an overheated, over-leveraged economy with the sort of problems one should expect from any economy pursuing such tigerish goals, and in Turkey's case they are massive : a huge current account deficit, inevitable in a nation reliant on imports ; raging inflation, 15.4% in the year to June but bound to move higher; a tumbling currency; and unsustainably high levels of corporate debt, much of it denominated in foreign currency, which also serves to undermine confidence in a banking system considered comparatively secure.
As is the way with these things, vicious circles are at play here. Think of how the steep fall in the value of the Lira adversely effects the costs of imports and therefore steepens both inflation and the current account deficit, and also increases the burden on companies who have borrowed in foreign currency trying to meet their debt obligations. The question now is what to do about rectifying the situation ? The almost universally accepted wisdom is that to counter the problems associated with an overheated economy -- in particular raging inflation and a weakening currency -- you have to cool it down, and that means hiking interest rates ..... very possibly repeatedly.
That's not a view shared by President Erdogan, who loathes high interest rates. We can see that his stated opinion that higher rates of interest only make the rich richer and the poor poorer must have some appeal for his populist supporters. Unfortunately, tough though it is, tightening monetary policy is the only medicine likely to be effective in addressing Turkey's problems whilst pursuing further growth by increasing levels of infrastructure spending, loosening fiscal policy in other words, merely adds fuel to a fire already ablaze.
President Erdogan, and his Minister of Treasury and Finance Berat Albaylak (Erdogan's son-in-law and presumably something of a puppet), had promised to announce measures to counter the crisis over the weekend. This morning's further lurch lower reflects the market's disappointment with those measures. Limits were put on USD / TRY swap trading to stop some of the speculative attacks on the currency, and the level of reserves that lenders are required to lodge with the central bank was reduced, thus adding liquidity into the system. Mr Albaylak also promised to take all necessary measures to maintain financial stability. But as we know talk is cheap, and the one measure that the markets would like see taken -- hiking rates -- is not one that the Minister, or more to the point his controller the President, is prepared to take .... not yet anyway.
All this would be bad enough in any circumstances, but of course, to make matters worse (much, much worse) the whole drama is being played out against a background of an angry brawl between Turkey and the United States, which was sparked by the arrest and confinement of an evangelical American pastor in Turkey. President Trump has demanded his release and slapped sanctions on Turkey, whilst his counterpart in Ankara has responded by saying that his country is at "economic war" with the US. Bold talk, but Turkey's economy and particularly its currency need US sanctions like a hole in the head.
Some might say that in order to prevent the currency crisis escalating into something truly disastrous, sooner or later Mr Erdogan will have to back down on the issue of higher rates and on his stance on the diplomatic spat with Mr Trump. Unfortunately, the Turkish President is nobody's idea of a man inclined to back down on anything, and the market action tells us that there's a feeling that things may well get worse before they get better. Beyond Turkish assets, there's been spillover selling across emerging markets, particularly S. Africa and Indonesia (which has similar issues to those of Turkey). US Treasuries have seen safe-haven buying, as have the US Dollar and the Jap Yen. In contrast the Euro has been pushed lower, reflecting concern that European banks may carry an unhealthy amount of Turkish exposure. "Something we used to call a safe-haven, Gold, has fallen to less than $1200 per oz at one point earlier, its price driven the strength of the dollar in which it's quoted.
There is another element to all this ..... As Turkey falls out with the US and by extension the West as a whole, into whose arms will it leap for support ? Given Turkey's pivotal geographical and strategic importance (and because it would be breaking from NATO), Russia would love to strengthen ties with Turkey. Mr Putin would no doubt be prepared to offer loans to achieve those ambitions, though the extent of his ability to help would no doubt be limited by the sanctions placed by the US on his own country. The situation looks tailor-made for China to step into, but in the current circumstances, Beijing may want to avoid antagonising Mr Trump any more than they have to. The Qataris, isolated by their own neighbours, need all the friends they can get and may offer help, but it's doubtful that they have the requisite ammunition on their own. The point is, we can't be sure which way this may go and for markets, that's not a happy position at all.