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Turkey lira crashes as Trump piles on pressure
ISTANBUL, Aug 11, 2018 (BSS/AFP) – The embattled Turkish lira tumbled over
16 percent to new record lows against the dollar as strains with the United
States intensified, but President Recep Tayyip Erdogan defiantly proclaimed
Turkey would emerge victorious in an “economic war”.
Compounding the lira’s agony, President Donald Trump said Friday he had
doubled steel and aluminium tariffs on Turkey, noting that relations between
the NATO allies were “not very good”.
The lira’s plunge on Friday is one of the most serious economic crises that
Erdogan has faced since coming to power in 2003 in the wake of a financial
crisis in 2001 that brought the economy to near meltdown.
“The plunge in the lira which began in May now looks certain to push the
Turkish economy into recession and it may well trigger a banking crisis,”
said Andrew Kenningham, chief global economist at Capital Economics.
The currency turbulence coincides with the most bitter dispute with the
United States since the 1974 Turkish invasion of Cyprus, which so far shows
no sign of abating.
Fears over contagion even pushed global equity markets lower, with some
European banks coming under heavy selling pressure due to their exposure to
Turkey.
The lira was trading at 6.47 to the dollar at 1900 GMT, a loss on the day
of 16.6 percent. Earlier it had fallen as much as 22 percent.
“The last time I can remember a currency exploding into a similar
acceleration of weakness to what we have seen in the past 24 hours is the
Russian ruble crisis that transpired late in 2014,” said Jameel Ahmad, head
of currency strategy at FXTM.
The tumult also affected Wall Street, which finished the week on a sour
note, with the Dow Jones, S&P 500 and Nasdaq all finishing down on Friday.
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– ‘National fight’ –
But Erdogan, who had remained unusually silent until now as the lira crisis
mounted, urged Turks to take matters into their own hands.
“If you have dollars, euros or gold under your pillow, go to banks to
exchange them for Turkish lira. It is a national fight,” he said.
“This will be the response to those who have declared an economic war,” he
said, blaming Turkey’s woes on what he described as an “interest rate lobby”
seeking to push the country to higher rates.
Erdogan had raised eyebrows Thursday when he appeared to invoke divine
intervention, saying: “If they have dollars, we have our people, we have our
right and we have Allah!”
Turkey remains at loggerheads with the United States over the detention for
the last two years of American pastor Andrew Brunson and a host of other
issues.
Trump intensified the alarm on financial markets with his new tweet
doubling the tariffs, noting for good measure the lira was sliding “rapidly
downward against our very strong Dollar!”.
“Our relations with Turkey are not good at this time!” he added.
But Erdogan said Turks should not be alarmed by exchange rate movements.
“The dollar, the mollar, will not cut our path,” said Erdogan, using a figure
of speech he repeatedly uses to mock something.
Turkey had alternatives “from Iran, to Russia, to China and some European
countries”, he added.
Erdogan also Friday held telephone talks with Russian President Vladimir
Putin, discussing economic and trade issues as well as the Syria crisis, the
Turkish presidency said.
The Turkish foreign ministry hit back at Trump’s comments, saying that the
“only result will be harming our relationship” and vowing unspecified
retaliation.
It added that Trump’s remarks were “not possible to reconcile with state
seriousness”.
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– ‘Increasingly unlikely’ –
Markets are deeply concerned over the direction of domestic economic policy
under Erdogan with inflation at nearly 16 percent but the central bank
reluctant to raise rates in response.
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 US may also be needed.
And it remains unclear if the bank would be willing to sharply lift rates,
with analysts saying the nominally independent institution is under the
influence of Erdogan, who wants low rates to keep growth humming.
After winning a June election with revamped powers, Erdogan tightened his
control over the central bank and appointed his son-in-law Berat Albayrak to
head a newly-empowered finance ministry.
“President Erdogan’s strengthened powers under the new presidential system
have made it increasingly uncertain whether policymakers will be able to act
to stabilise the economy,” said William Jackson, chief emerging markets
economist at Capital Economics in London.
Concerns mounted Friday after a report in the Financial Times that the
supervisory wing of the European Central Bank had over the last weeks begun
to look more closely at eurozone lenders’ exposure to Turkey.
The report said the situation is not yet seen as “critical” but Spain’s
BBVA, Italy’s UniCredit and France’s BNP Paribas are regarded as particularly
exposed.
Albayrak, who formerly served as energy minister, on Friday announced what
he has described as a “new economic model” for Turkey but he focused on
macro-economic issues and steered well clear of tackling the currency crisis.
The lira’s plunge has featured remarkably little on Turkish television
channels and newspapers — most of which after recent ownership changes are
loyal to the government — with media focusing instead on recent flooding by
the Black Sea.
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