Turkey, a member of NATO, a one-time candidate for EU membership, and a budding Islamist dictatorship, is on the verge of a full-bore meltdown of its financial market. The Turkish lira has been staggering toward crisis for several months as Turkish President Recep Tayyip Erdogan implement the much the same decisions that one would have expected if he’d used Alexandria Ocasio-Cortez as a financial advisor. Turkey had an unmanageable debt-to-GDP ratio, inflation was beginning to kick in, and Erdogan thinks raising interest rates to control inflation is the spawn of Satan. This is something they apparently teach instead of economics wherever it was that Erdogan and his lackeys went to school.
1994, 2001, 2018: Original sin over and over again! #Turkey companies and banks have been on a Dollar & Euro borrowing binge so a currency crisis morphing into a fin & debt crisis. Add Erdogan and Turkey is already on the brink. https://t.co/7y3f3WuotF via @welt pic.twitter.com/R1upamYCEB
— Holger Zschaepitz (@Schuldensuehner) August 11, 2018
— Holger Zschaepitz (@Schuldensuehner) August 10, 2018
The proximate cause of the Ferrari-like acceleration of the current crisis into something that Erdogan may not be able to survive is pretty easy to understand. Erdogan blames a Turkish preacher, Fethullah Gülen, who lives in the US for a coup attempt against him in 2016. He has demanded extradition of this man and been rebuffed. To improve his bargaining position, Erdogan’s regime did what any Turkish whoremonger would have done, they arrested an American pastor, Andrew Brunson, and charged him with terrorism. Presumably, if we sent their pastor back, they will send ours home. At the NATO summit, Erdogan and Trump reached an agreement. Brunson would be sent home and Trump would prevail upon Israel to release a Turkish terrorist. Trump and Israel did their part. Erdogan reneged.
This was not a smart move.
Trump ordered sanctions imposed upon two members of Erdogan’s cabinet. While having little physical impact on Turkey’s economy, it had a major psychological impact. The Turkish lira began to fall. Then he piled on:
President Trump’s decision to double steel tariffs on Turkey as its government battled a currency collapse marked a departure for the U.S. from how it traditionally handles financial turmoil hitting emerging markets.
Washington has generally tried to calm global markets in such moments, especially when investors are gripped by fear of contagion. Mr. Trump instead squeezed Ankara further, raising tariffs on Turkish steel imports to 50% and aluminum to 20%, which deepened the Turkish lira’s drop and worsened market fears that its banks could be shaken.
Administration officials didn’t clarify Mr. Trump’s motives. The move followed a series of actions the Trump administration has taken in recent weeks to step up economic pressure on Turkish President Recep Tayyip Erdogan to release American evangelical pastor Andrew Brunson.
I have just authorized a doubling of Tariffs on Steel and Aluminum 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!
— Donald J. Trump (@realDonaldTrump) August 10, 2018
This has upset a lot of apple carts:
Over three decades of periodic currency storms, such as the early 1990s Mexican peso plunge, and the Asian crisis a few years later, “the market’s underlying assumption was that the U.S. would try to be helpful” during periods of extreme foreign-exchange volatility, said Shahab Jalinoos, head of global currency strategy at Credit Suisse Group. “Now the market can no longer assume that.”
Mr. Trump’s mention of the Turkish lira’s plunge suggested a willingness to tolerate the currency’s collapse.
Following Mr. Trump’s tweet, the lira fell another 9% and then recovered some of its losses. Turkey’s currency woes have stoked instability in other emerging markets such as South Africa, Hungary and Russia, as investors worry about similar fragility there. It also jolted European stocks and the euro, as investors focused on the possible costs to European banks holding Turkish debt.
“If a crisis were to emerge somewhere in the world with the possibility of contagion, what is President Trump’s response going to be? Cooperation with the world and showing leadership? Or more tariffs?” said Chad Bown, a trade expert at the Peterson Institute for International Economics and a frequent critic of the administration’s trade strategy. “This was not a good sign.”
There is a lot of utter bullsh** floating around here. Erdogan’s Turkey has virtually declared a cultural war on Europe both facilitating the flow of “refugees” from camps in Turkey into Europe and encouraging Turks in Europe to outbreed natives of their host countries. As late as the autumn of 2017, Erdogan and his henchmen were talking smack about how they didn’t give a f*** about a US alliance anyway:
Turkish President Recep Tayyip Erdogan hasn’t been a reliable U.S. ally since before the failed 2016 coup attempt, which he blames on the U.S.-based Turkish preacher Fethullah Gulen. In a recent essay about the U.S. war against Islamic State, former Defense Secretary Ash Carter wrote that Turkey “caused the most complications for the campaign” starting well before the coup.
The two countries’ key interests diverged wider than ever, given U.S. support for Kurds in Iraq and Syria, whom Turks — not just Erdogan — traditionally consider a major threat. Since the U.S. has refused to hand over Gulen, the rift became both geopolitical and increasingly personal, regardless of President Trump’s early overtures to Erdogan and even his reaffirmation of friendship at the recent United Nations gathering. That the U.S. has now suspended non-immigrant visas for Turks in response to the arrests of some dual citizens is just a tangible manifestation of the growing divide.
Turkey’s angry tit-for-tat response shows Erdogan doesn’t attach too much value to smoothing relations with the U.S. In 2016, Americans accounted for 460,000 of Turkey’s 25.3 million foreign visitors, so if they stop coming at all, it won’t be a major blow to Turkey’s important tourist industry, which is more dependent on Europeans and Russians. The U.S. is a relatively important trade partner, having absorbed $8.1 billion in Turkish exports last year, but the exports are so diversified that Erdogan may feel Turkish business can absorb a dent in trade. And with the world’s eighth strongest military, Turkey may feel less in need of NATO’s protections these days given all the constraints that imposed in return.
Turkey will have also looked around and learned a few things from Vladimir Putin and other authoritarian leaders. With its annexation of Crimea, Russian President Vladimir Putin showed there is more room for misbehaving than many thought. A prolonged spat with the U.S. might bring something of an asset sell-off, a stock-market drop and higher political risks factored into borrowing costs. Russia has weathered it; its 10-year bond yields 7.5 percent now; it never went much lower. Turkey has less of a cushion in the form of foreign reserves and a negative trade balance, but Erdogan is unlikely to be too worried about the recent jump in his country’s government bond yields, driven by the tension with the U.S.
Turkey had exactly two functions in NATO. It controlled the Bosporus and Dardanelles and could prevent the Soviet Black Sea Fleet from sortieing into the Eastern Med. It provided close proximity to the border of the USSR which made listening stations there very valuable. Since the fall of the USSR and the rise of Erdogan, Turkey’s strategic position has become much less useful and its bad behavior much more of an issue. At present, having Turkey as an ally is presenting many more problems than opportunities. And, other than the optics of booting the only non-European country from NATO, NATO would be much better off without Turkey than with it.
One has to suspect that sanctioning two Turkish thugs and increasing tariffs on Turkish steel and aluminum is only the beginning of the process. The next weeks will see massive capital flight out of Turkey as people fearing both potential sanctions and economic collapse. Nothing the Turkish government is doing is building confidence. Erdogan’s call on Friday for Turks, in a show of patriotism, to sell gold and real currency in order to buy Turkish lira was seen more as a move born of desperation than a real strategy. One has to know that European banks with significant exposure in Turkey are looking for the escape hatch and ejection seat.
#Turkey matters: Lira crisis is becoming more & more of a problem for Europe. European banks drop on concern they may suffer heavy losses from Turkish exposure. Most at risk for #Spain‘s banks, but #Italy or #France have reasons to be concerned. https://t.co/0cUrxty70z via @welt pic.twitter.com/x8rZWbJEUl
— Holger Zschaepitz (@Schuldensuehner) August 10, 2018
To put the Turkish financial crisis in some perspective–the total value of the Turkish stock market is now less than the market cap for Netflix. There are 80 million people in Turkey.
— George Demacopoulos (@GDemacopoulos) August 10, 2018
Odds are that Turkey experiences a fiscal meltdown. Between Erdogan’s fiscal policies, a lack of confidence in the ability of his government to do squat, and the fact that the US government isn’t going to help him out, it is hard to see how this doesn’t go full-metal Argentina before it is all over.
— Guy Elster (@guyelster) August 10, 2018
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