Turkey comes back from a national holiday next week, and in case you have a short memory, the country is rapidly descending into economic chaos.
The problems are myriad and self-feeding:
- Fed tightening is putting the squeeze on emerging markets as the global hunt for yield reverses, and countries that have borrowed heavily in foreign currencies are the first dominos to fall
- President Recep Tayyip Erdogan refuses to budge when it comes to implementing the kind of draconian rate hikes necessary to arrest the slide in the currency and bring inflation under control.
- The Trump administration has been steadfast in its refusal to negotiate for Andrew Brunson where “negotiate” means allowing Erdogan to use the detained pastor as leverage to secure leniency for Halkbank.
Turkey did manage to put the brakes on the lira slide using a two-part swaps crackdown and a stealth rate hike, with the latter implemented by forcing everyone to use the overnight market. There’s a detailed account of that here, but this is what it looks like:
Unfortunately, one side effect of curtailing swaps transactions was a selloff in lira assets, so we’ll have to see how markets respond going forward. The Borsa Istanbul and especially Turkish financials are in a veritable tailspin.
Meanwhile, the lira is still more volatile than Bitcoin and Tesla:
(Bloomberg / h/t Luke)
On Friday, Mustafa Varank (Turkey’s Minister of Industry and Technology) was in Argentina for the G20 Digital Economy Ministerial Meeting, and he’s got some ideas for how Turkey is going to weather the storm.
“With tools of the digital economy, we can find ways to implement payment and barter systems independent of every kind of political intervention, so we can break global privileges of some currencies,” he mused, before lamenting the fact that Turkey is spiraling further down the trade war rabbit hole with the U.S. thanks to Trump’s decision to use tariffs to pressure Ankara in the Brunson dispute. Erdogan responded, slapping duties on a range of U.S. goods including liquor and cars.
More importantly, this war has turned into a financial war. As a result, we’ve seen some volatility in our currency. There has been no rational macro-economic basis for this move.
The point is, this happened to Turkey but the risk exists for all other countries which may face similar conditions.
The idea that there’s no “macro-economic basis” for lira weakness is patently false. However, that latter point (about other countries facing the same risk) is unequivocally true – just ask South Africa and Indonesia. But what I would gently suggest is that Turkish officials avoid references to things that have the potential to make an already terrible situation worse.
Erdogan has made a series of comments over the past several weeks that seem to undercut his son-in-law’s contention that capital controls are not in the cards and in the same vein, talking about resorting to “barter systems” (digital or otherwise) when the market is already on edge is probably not best.