Turkish lira continues downward spiral, hits new record low

Daniel Fowler
August 11, 2018

Together, that can weigh on the currency.

The current market expectation is that a rate increase of at least 5pc, from the current 17.75pc interest rate, will be required to stem the tide of Lira losses and traders are nervously awaiting any announcement of an emergency central bank meeting which may happen next week.

Erdogan, a self-described "enemy of interest rates", wants cheap credit from banks to fuel growth, but investors fear the economy is overheating and could be set for a hard landing. The central bank, officially independent, appears to have heeded Erdogan and has not raised rates when many - including the International Monetary Fund - said it should have.

Erdogan's claim of a Western political plot against him sparked alarm in investors and prompted an acceleration in the currency sell-off. Speaking in the northeastern province of Gumushane, Erdogan said, "Apparently, those who believe they can force us to capitulate don't know [our] people at all".

In many nations, including the USA and European Union states, the central bank is independent of government and no one can tell it what to do with interest rates. In July, the president warned in a tweet that the U.S.

Turkey said it would respond to the new US tariff action "without delay" and warned the move would further harm relations between the two countries. He added, "Our relations with Turkey are not good at this time!".

UBS chief economist for EMEA emerging markets Gyorgy Kovacs said a giant rate hike of 350-400 basis points would be "consistent with real rate levels that in the past helped to stabilise the currency" but warned a deal to normalise ties with the U.S. may also be needed.

Erdogan, whose typical defiance in the face of the crisis has further unnerved investors, appealed to Turks' patriotism and urged support for their free-falling currency.

The value of Turkey's currency has nosedived since January and has lost more than 34% of its value against the dollar. Corporate foreign currency loans total about $250 billion, much of which is due to be repaid in a year. So the sudden fall raises the possibility of corporate bankruptcies or bank failures that could hurt the economy.

Turkey, a North Atlantic Treaty Organisation ally, him on trial for espionage and terror-related charges linked to a failed coup attempt in the country two years ago.

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Indeed, the turmoil in Turkey could ultimately touch overseas banks - especially those with large worldwide or Wall Street operations - through a variety of channels.

Europe is also dependent on Turkey to restrain the flow of migrants from conflict in the Middle East in return for aid.

Turkey is a major emerging market economy with $466 billion in foreign debt (about 78 percent in USA dollars and about 18 percent in euros), or 52.9 percent of gross domestic product.

"If some of these vulnerabilities crystalise they could tip the economy into a full blown crisis", said its economist Yasemin Engin.

On March 1, Trump had announced global tariffs of 10 percent on all aluminum to the USA and 25 percent on all steel imports. He is a self described "enemy of interest rates" and wants banks to lend cheap credit to fuel growth, something experts are anxious could seriously affect the economy.

Q: What is Erdogan proposing to do?

Ankara blames for an attempted coup in 2016.

On Friday, Erdogan asked Turkish citizens to sell off their gold and dollars and exchange them for the lira, in an attempt to prop up the currency.

"The basic reason the exchange rate has gone off the rails is that confidence in the management of the economy has disappeared both domestically and overseas", said Seyfettin Gursel, a prominent economist and a professor at Turkey's Bahcesehir University.

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