Why Turkey's currency is plunging and what it means

Anna Jefferson
August 11, 2018

US President Donald Trump is doubling tariffs imposed on Turkish steel and aluminum, insisting that the relationship between the two countries is 'not good'.

President Recep Tayyip Erdogan's current dash for growth coupled with unorthodox pronouncements on monetary policy - including that lower rates can bring down inflation - have put him on a collision course with markets.

It argued that the country accounted for less than 2 percent of group revenues and a 10 percent fall in the lira would affect its CET1 ratio - capital that must be set aside as a buffer against financial shocks - by only around 2 basis points.

Reverberations spread through global markets, with European stock markets especially hit as investors took fright over banks' exposure to Turkey.

"With EMEA a source of geopolitical risk, we think it will be hard for the ZAR to also stabilise - in effect the Rand's source of market risk has shifted from a weaker CNY to a weaker TRY and RUB", says foreign exchange strategist Viraj Patel with ING Bank N.V.

The value of the Turkish Lira has fallen by 2/3 since the start of the year.

The Turkish lira hit a record low on Friday before Mr Trump's tweet, which also said "our relations with Turkey are not good at this time!".

"Their currency, the Turkish lira, slides rapidly downward against our very strong dollar!"

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Adding to Turkey's fiscal woes, new pension and spending increases announced by president Erdogan in the lead-up to his recent election win have further weakened the outlook for Turkey's public finances. Some 4 million displaced people, most them from Syria, are now living in Turkey.

Harsher US tariffs were likely to punish Turkey's already faltering steel exports to the United States.

White House spokeswoman Lindsay Walters later clarified, "As he stated, the president has authorized the preparation of documents to raise tariffs on imports of steel and aluminum from Turkey".

It is unclear how that would justify higher tariffs on Turkey but not other countries.

The US has refused to extradite Fethullah Gulen, who lives in Pennsylvania. Conservative evangelical Protestants are a key constituency at home for U.S. President Donald Trump.

Erdogan Friday held telephone talks with Russian President Vladimir Putin, discussing economic and trade issues as well as the Syria crisis.

Trump last month threatened to slap "large sanctions" on Turkey if it did not release American pastor Andrew Brunson, who faces charges of espionage for allegedly supporting a failed coup attempt in 2016.

The lira sell-off has deepened concern over whether over-indebted Turkish companies will be able to pay back loans taken out in euros and dollars after years of overseas borrowing to fund a construction boom under Erdogan.

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Trump made his unexpected announcement on Twitter from his golf club in Bedminster, New Jersey, as the Turkish currency, the lira, fell to all-time lows against the US dollar.

"This is a domestic and national struggle", Erdoğan said, according to The Associated Press.

USA officials have said the courts would require sufficient evidence to extradite the elderly Gulen, who has denied any involvement in the coup.

The lira's plummeting value, the potential for debt defaults, the possibility of a balance-of-payments crisis and rising inflation all represent clouds gathering ahead of an economic storm that could batter the country.

Last week, the United States imposed sanctions on Turkey's justice minister and interior minister for not releasing USA pastor Andrew Brunson.

"First of all, confidence needs to be regained".

"I don't think foreign banks will be willing to lend to Turkish banks".

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