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The Turkish currency and debt crisis of 2018 is an ongoing financial crisis in Turkey with international repercussions due to financial contagion. It is characterized by a plunging value of the Turkish lira, high inflation, rising borrowing costs and corresponding loan defaults.

Current account deficit and forex debt

A longstanding characteristic of the economy of Turkey is a low savings rate. Since under the government of Recep Tayyip Erdoğan, Turkey has been running huge and growing current account deficits, reaching $ 7.1 billion by January 2018, while the rolling 12-month deficit rose to $ 51.6 billion, one of the largest current account deficits in the world. The economy has relied on capital inflows to fund private-sector excess, with Turkey’s banks and big firms borrowing heavily, often in foreign currency.

By the end of 2017, the corporate foreign-currency debt pile in Turkey had more than doubled since 2009, to $ 214 billion after netting against their foreign-exchange assets, equal to about 40 percent of economic output, with about 80 percent held by domestic banks. Turkey's gross external debt, public and private, stood at $ 453 billion at the end of 2017.

Presidential interference with the central bank

In 2018, the lira's exchange rate accelerated deterioration, reaching a level of 4.5 USD/TRY by mid-May and of 4.9 USD/TRY a week later. Among economists, the accelerating loss of value was generally attributed to Recep Tayyip Erdoğan preventing the Central Bank of the Republic of Turkey from making the necessary interest rate adjustments. Erdoğan, who claimed interest rates beyond his control to be "the mother and father of all evil", in a 14 May interview with Bloomberg said that "the central bank can't take this independence and set aside the signals given by the president."

Presidential interference with central bank policy comes with a general perception in international investment circles of a "textbook institutional decline" in Turkey, with Erdoğan seen increasingly reliant on politicians whose main qualifications for their jobs is loyalty at the expense of more qualified and experienced options. Erdoğan also has a long history of voicing Islamist discourse of interest based banking as "prohibited by Islam" and "a serious dead-end." As a consequences of policies, Turkey has thus experienced substantially higher inflation than other emerging markets.

War in Syria

= Refugee inflow

European rift

Tourism

Credit agency downgrade

PKK conflict

Consequences in Turkey

Lenders in Turkey were hit by restructuring demands of corporations unable to serve their USD or EUR denominated debt, due to the loss of value of their earnings in Turkish lira. While financial institutions had been the driver of the Istanbul stock exchange for many years, accounting for almost half its value, by mid-April they accounted for less than a third.

During the emergence of the crisis, cash-strapped banks continuously raised interest rates, both for deposits and for business and consumer loans.

Timeline

• On 12 February, Yildiz Holding unexpectedly requested to restructure as much as $7 billion in loans.

• On 5 April, Mehmet Simsek, the deputy prime minister in charge of the economy, sought to resign due to disagreement with president Recep Tayyip Erdoğan about the latter's interference with central bank policy, but later was convinced to withdraw his resignation.

• On 7 April, Dogus Holding applied to its banks for debt restructuring. Dogus’ outstanding loans stood at the equivalent of 23.5 billion Turkish lira ($5.81 billion) at the end 2017, up 11 percent from the year before.

• On 18 April, president Erdoğan announced that the upcoming general election would be held early on 24 June.

• On 15 May, in a meeting with global money managers in London, Erdoğan said that he planned to take greater control of the economy after the elections, causing "shock and disbelief" among investors about the central bank’s ability to fight inflation and stabilize the lira. On 16 May, Republican People's Party (CHP) presidential candidate Muharrem İnce and İyi Party presidential candidate Meral Akşener both vowed to ensure the independence of the Central Bank of Turkey if elected.

• On 23 May, foreign exchange bureaus in Istanbul temporarily stopped trading amidst an extreme dive in the price of the lira.

International consequences

Financial institutions from France and Italy had a major exposure to the Turkish banking system, making them particularly vulnerable to financial contagion.

Timeline

• By 22 May, Turkish government bonds traded at prices lower than those of Senegal.

• On 22 May, the Turkish Republic of Northern Cyprus government started discussing abandonment of the Turkish lira for another currency.

Conspiracy theories

In the campaign for the 2018 general election in Turkey, a widespread conspiracy theory, infused with antisemitism, claimed that the Turkish lira's decline were the work of a shadowy group, made up of Americans, English, Dutch and "some Jewish families" who would want to deprive incumbent President Erdogan of support in the elections. According to a poll from April 2018, 42 percent of Turks, and 59 percent of governing AK Party voters, saw the decline in the lira as a plot by foreign powers.

Members of the government have promoted such conspiracy theories. On 23 May, Turkey’s energy minister, Erdoğan’s son-in-law Berat Albayrak, told the media that the recent sharp drop in the value of the lira was the result of the machinations of Turkey’s enemies.

References

1. ^ "How Turkey fell from investment darling to junk-rated emerging market". The Economist. 19 May 2018.
2. "Turkish current account deficit more than doubles". Ahval. 12 March 2018.
3. "Turkey's Bill for Debt-Fueled Economic Growth Starts to Fall Due". Bloomberg. 29 March 2018.
4. "Turkey's external debt stock reaches $453.2B". Anadolu. 30 March 2018.
5. "Exchange rates". OECD.
6. ^ "Turkey's leader is helping to crash its currency". Washington Post. 16 May 2018.
7. "Investors lose their appetite for Turkey". Financial Times. 16 May 2018.
8. "Why Investors Have Become Skittish About Turkey". Bloomberg. 18 May 2018.
9. "Turkish lira falls further as Erdogan calls for interest rate cuts". Financial Times. 24 November 2016.
10. "Rise of Turkish Islamic banks chimes with Erdogan's ideals". Reuters. 15 March 2015.
11. "With high inflation, Turkish lira lacks yield buffer". Reuters. 11 October 2017.
12. "Investors Bet Against Turkey Banks as Debt Wave Gains Force". Bloomberg. 10 April 2018.
13. "Cash-hungry Turkish banks raise rates to highest since crisis". Ahval. 9 April 2018.
14. "Yildiz $7 Billion Restructuring Bid Adds to Turkish Bank Woes". Bloomberg. 12 February 2018.
15. "Rumors of Turkish deputy PM's departure spook markets". Al-Monitor. 5 April 2018.
16. "Turkey's Dogus in talks with banks on debt restructuring". Reuters. 7 April 2018.
17. "'Disbelief': Investors in Turkey stunned by Erdogan's fight with markets". Reuters. 15 May 2018.
18. "Erdogan's policies driving Turkey to the edge, challenger says". Reuters. 16 May 2018.
19. "'Tired driver' is sending Turkey's economy over cliff edge: İYİ Party head Akşener". Hurriyet Daily News. 16 May 2018.
20. "CHP presidential candidate Muharrem İnce vows to ensure Central Bank independence if elected". Hurriyet Daily News. 17 May 2018.
21. "Istanbul foreign exchange bureaus close to survive turbulence". Ahval. 23 May 2018.
22. "Turkey's Economy Under Great Stress After Erdogan's Monetary Remarks". The Globe Post. 22 May 2018.
23. "Storm in Turkey's economy as bonds trade below Senegal's". Ahval. 22 May 2018.
24. "Turkish Cypriots consider abandoning sinking lira". Ahval. 22 May 2018.
25. "Tumbling Turkish lira tests voters' support for Erdogan". Financial Times. 18 May 2018.
26. "Forty-two percent of Turks say lira's drop is foreign plot". Ahval. 18 May 2018.
27. "Currency crisis "clear operation" against Turkey - Energy minister". Ahval. 23 May 2018.

• Currencies of Turkey
• Economy of Turkey
• Economy of Northern Cyprus