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August 10, 2018 www.intellinews.com I Page 2
Turkey stares into the abyss
The market did not like what it was hearing and the Turkish lira (TRY) sank back under 6.0 to the dollar as Erdogan delivered further rhetoric in
a speech to a crowd in Bayburt, south of Rize (where at 82% he got his highest share of the vote in the June elections) after regular Friday prayers at a mosque. During his address a new all-time low for the lira of 6.1480 versus the US dollar was recorded. The president said: “The ones who have dollars, euros, gold under their mattresses, shall exchange them. We will, Inshallah, respond with our local currency...The dollar cannot block our path... Our solidarity will be the best response to the West.”
Referring to Turkey as working on “alternatives” such as China, Russia, Iran and some European states, without specifying what he meant by that, Erdogan also stated: "We're going to continue to respond in kind to hands extended in friendship. Still, we have plans against all possibilities. I'm calling on interest rates lobbies: don't get high on your ambitions. You won't be able make money on the back of this nation. You won't be able to make this nation kneel."
Not long after Erdogan spoke, US President Donald Trump made matters very much worse for the lira by putting out a tweet reading: “I have just authorized a doubling of Tariffs on Steel and Alu- minum 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!” That sent the TRY skidding to
a fresh all-time low beyond an eye-popping 6.80, making it the world's worst performing currency of 2018, outdoing the Argentine peso. The tweet came just as Finance Minister Berat Albayrak was unveiling a new economic plan to address Tur- key’s economic woes.
Contagion
With Turkey’s crisis having become so severe, global markets were looking at what level of con- tagion might be expected to spread.
Exposure is "pretty international". "European, US, Japan, China, Middle East — everyone," Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management, told CNBC. How- ever, Ash played down risks that Turkey could be- come a sovereign debt problem. "I don't see huge global contagion. Turkey is still a relatively small economy— [worth] $850bn, and [it is] unlikely this will be [a] sovereign debt event," he added.
The TRY has now lost more than a third of its value against the dollar since the start of the year, with markets aghast that the Turkish central bank ap- pears to have lost its independence to a president with maverick economics. Turkey’s problems have mounted up relentlessly. The overheating economy is roiled by the never-ending descent of the lira, roaring double-digit inflation, a current account deficit that is one of the widest in the world and huge hard currency-denominated debts carried by corporates and banks that grow heavier the weaker the TRY becomes — yet Erdogan still does not sup- port interest rate hikes for an economy he says still needs cheaper money for more growth.
Reports emerged on August 10 that officials at the European Central Bank (ECB) are concerned over southern European banks, which have lent significant amounts of money in Turkey. The implication is that investors holding equity in European banks could be at risk. The jitters had dragged the pan-European Euro Stoxx 600 index down 0.7% in early trading.
Bank for International Settlements (BIS) data showed Spanish banks were owed $83.3bn by Turkish borrowers; French lenders $38.4bn; and banks in Italy $17bn. Regulators will be anxious that the devastated TRY could spark defaults in foreign loans.
UniCredit, BNP Paribas and BBVA are being widely cited as the European banks with the high-