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You can find the current article at its original source at https://www.theguardian.com/business/live/2018/aug/13/turkey-financial-crisis-contagion-fears-hit-markets-as-central-bank-takes-action-business-live
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| Turkish lira crisis: Erdoğan says 'attacks will continue' against the economy - live updates | Turkish lira crisis: Erdoğan says 'attacks will continue' against the economy - live updates |
| (35 minutes later) | |
| Economics columnist Matt O’Brien has written a pithy explanation of the Turkish financial crisis, which new readers might find particularly helpful: | |
| The Turkish lira is down another 6.4% today to 6.87 per dollar. It’s nearing the level where Goldman said some Turkish banks would begin to run through their extra capital. It’s no wonder, then, that their central bank just cut the reserve requirement ratio for their banks… pic.twitter.com/cuSRlFnI73 | |
| Why is the lira falling so much? Trump’s tariffs aren’t helping, but this is mostly a story about Erdogan’s mistakes. He’s forcing the central bank to keep interest rates low in the face of rising inflation & a weakening currency, and he’s not backing down either. | |
| Erdogan continues to say this is an “economic war” that the Turkish people need to fight by selling their dollars & gold for lira, suggesting that he won’t do what’s necessary—rate hikes, spending cuts, and probably capital controls— himself to prop up the lira. | |
| In fact, Erdogan has criticized the “traitors” who are saying that Turkey might need capital controls.Maybe the worst sign, though, is that Erdogan insists that Turkey has “strong economic fundamentals.” (It doesn’t). That’s what you say right before things get really bad. | |
| As @paulkrugman points out, it's hard to imagine that this doesn't end with some kind of default/repudiation and capital controls. The only question is how long it takes Erdogan to get there. At the speed the lira is falling, it might not be long. https://t.co/pFWKU9HePt | |
| The last thing to keep in mind is that Turkey's people already hold a lot of their money in dollars instead of lira. Those bank deposits could make for a tempting target for the government, something it's already had to deny thinking about. | |
| In another worrying sign, the cost of insuring Turkish government bonds has jumped today. | |
| The cost of a five-year credit default swap (which would pay out if Ankara can’t repay its bonds) jumped to 573 basis points, up from 452bp on Friday. | |
| That’s according to data firm Markit, and suggests Turkish debt is now seen as riskier. | |
| Turkey 5Y CDS 121bps wider today at 573bps. Some fallout on other EM Sovs, particularly South Africa. Screenshot from Markit's new FI pricing platform pic.twitter.com/uimPnnpCzK | |
| Technically, it means it would cost $573,000 per year to insure $10m of Turkish debt. | |
| After several hours of volatile trading, the Turkish lira has settled around 6.87 lira to the US dollar. | After several hours of volatile trading, the Turkish lira has settled around 6.87 lira to the US dollar. |
| That’s a loss of around 7% today (a whopping move by usual standards), but also a small recovery on the record low of 7.2 struck overnight. | That’s a loss of around 7% today (a whopping move by usual standards), but also a small recovery on the record low of 7.2 struck overnight. |
| It also means the lira has still lost a third of its value in the last week. | It also means the lira has still lost a third of its value in the last week. |
| The news that the Turkish central bank is offering more liquidity to commercial banks (see earlier post) seems to have stemmed the panic. | The news that the Turkish central bank is offering more liquidity to commercial banks (see earlier post) seems to have stemmed the panic. |
| However, investors still want to see more comprehensive action to tackle its inflation and current account deficit, such as a massive hike in interest rates. | However, investors still want to see more comprehensive action to tackle its inflation and current account deficit, such as a massive hike in interest rates. |
| Reto Foellmi, economist from the University of St Gallen, fears that further lira losses could be disastrous: | Reto Foellmi, economist from the University of St Gallen, fears that further lira losses could be disastrous: |
| The vibrant growth of Turkey relied heavily on financing in foreign-currency debt. While Turkish exports get cheaper, Turkish companies face higher repayment obligations of the loans which hurts banks as well. | The vibrant growth of Turkey relied heavily on financing in foreign-currency debt. While Turkish exports get cheaper, Turkish companies face higher repayment obligations of the loans which hurts banks as well. |
| As the Lira has a reputation as a weak currency, Erdogan’s rhetoric puts oil into the fire. With a further weakening of the Lira, Turkey faces a downward spiral, where default could be the end. | As the Lira has a reputation as a weak currency, Erdogan’s rhetoric puts oil into the fire. With a further weakening of the Lira, Turkey faces a downward spiral, where default could be the end. |
| #5things-Lira rout continues-Risk spreads beyond Turkey-Saudis eye Tesla investment-Markets drop-Quiet data weekhttps://t.co/pPysasxnbC pic.twitter.com/64y2cvGWCy | #5things-Lira rout continues-Risk spreads beyond Turkey-Saudis eye Tesla investment-Markets drop-Quiet data weekhttps://t.co/pPysasxnbC pic.twitter.com/64y2cvGWCy |
| The Turkish crisis dragged world stock markets to a one-month low today. | The Turkish crisis dragged world stock markets to a one-month low today. |
| The MSCI world equity index, which tracks shares in 47 countries, fell 0.6% this morning, as the Turkish lira hit fresh record lows against the US dollar. | The MSCI world equity index, which tracks shares in 47 countries, fell 0.6% this morning, as the Turkish lira hit fresh record lows against the US dollar. |
| That was driven by losses in Asia overnight, in Europe this morning, and at emerging markets across the world. | That was driven by losses in Asia overnight, in Europe this morning, and at emerging markets across the world. |
| Dean Popplewell of City firm OANDA says anxiety over Turkey has “severely bullied emerging markets into near submission.” | Dean Popplewell of City firm OANDA says anxiety over Turkey has “severely bullied emerging markets into near submission.” |
| In Japan, the Nikkei tumbled -2% to a five-week low overnight as a sell-off in emerging market currencies frightened investors, with the safe-haven yen’s (¥110.20) appreciation also hurting sentiment. The broader Topix dropped -2.1%. | In Japan, the Nikkei tumbled -2% to a five-week low overnight as a sell-off in emerging market currencies frightened investors, with the safe-haven yen’s (¥110.20) appreciation also hurting sentiment. The broader Topix dropped -2.1%. |
| Down-under, Aussie shares ended lower overnight, weighed down by materials and banks after the crisis in Turkey hit Asian assets, while global trade turmoil pushed commodity prices lower. The S&P/ASX 200 index fell -0.4%. In S. Korea, the Kospi ended down -1.5%, in line with other Asian countries. | Down-under, Aussie shares ended lower overnight, weighed down by materials and banks after the crisis in Turkey hit Asian assets, while global trade turmoil pushed commodity prices lower. The S&P/ASX 200 index fell -0.4%. In S. Korea, the Kospi ended down -1.5%, in line with other Asian countries. |
| However, America’s stock market is holding its nerve. Wall Street is calm in early trading, with the Dow Jones industrial average up 60 points (or 0.23%). | However, America’s stock market is holding its nerve. Wall Street is calm in early trading, with the Dow Jones industrial average up 60 points (or 0.23%). |
| U.S. stocks open slightly higher https://t.co/l8P6rc8Aep pic.twitter.com/c8pc9aCwL0 | U.S. stocks open slightly higher https://t.co/l8P6rc8Aep pic.twitter.com/c8pc9aCwL0 |
| The EIU’s Agathe Demarais adds that Turkey has a lot of work to do to regain market confidence -- but it’s not clear that such measures will be taken..... | The EIU’s Agathe Demarais adds that Turkey has a lot of work to do to regain market confidence -- but it’s not clear that such measures will be taken..... |
| With an overheated and indebted economy, Turkey will require credibly orthodox economic policies, fiscal discipline and central bank independence to reverse the current situation. | With an overheated and indebted economy, Turkey will require credibly orthodox economic policies, fiscal discipline and central bank independence to reverse the current situation. |
| A normalisation of relations with the US could also reduce the amount of legwork that the central bank will have to do to control the economic situation, but this is unlikely to happen at the moment. | A normalisation of relations with the US could also reduce the amount of legwork that the central bank will have to do to control the economic situation, but this is unlikely to happen at the moment. |
| In view of the domestic political and economic conditions, it is therefore unclear whether the necessary steps will be taken to contain the market fallout. | In view of the domestic political and economic conditions, it is therefore unclear whether the necessary steps will be taken to contain the market fallout. |
| Agathe Demarais, Turkey analyst at The Economist Intelligence Unit, has predicted that Western banks will suffer losses from the Turkish lira’s slump soon. | Agathe Demarais, Turkey analyst at The Economist Intelligence Unit, has predicted that Western banks will suffer losses from the Turkish lira’s slump soon. |
| She told the AFP newswire that the impact of the currency crisis will ripple through the financial world, as Turkish companies find they can’t service loans taken out in dollars. | She told the AFP newswire that the impact of the currency crisis will ripple through the financial world, as Turkish companies find they can’t service loans taken out in dollars. |
| “So far the impact of the lira crash has been limited in Europe and the rest of the world. | “So far the impact of the lira crash has been limited in Europe and the rest of the world. |
| “However, within a few months western banks that have strong ties with Turkey will feel the impact of the crisis as Turkish corporates will struggle to repay debt in foreign currency. | “However, within a few months western banks that have strong ties with Turkey will feel the impact of the crisis as Turkish corporates will struggle to repay debt in foreign currency. |
| “The sharp depreciation of the lira has almost doubled the local currency value of external debt repayments since the start of the year.” | “The sharp depreciation of the lira has almost doubled the local currency value of external debt repayments since the start of the year.” |
| Read my comments for @AFP on the Turkish lira plunge and why it will affect western banks in a few months https://t.co/SEelctqZEz | Read my comments for @AFP on the Turkish lira plunge and why it will affect western banks in a few months https://t.co/SEelctqZEz |
| German chancellor Angela Merkel has now waded into the crisis, urging Turkey to ensure the independence of its central bank. | German chancellor Angela Merkel has now waded into the crisis, urging Turkey to ensure the independence of its central bank. |
| Merkel told a news conference in Berlin that: | Merkel told a news conference in Berlin that: |
| “No one has an interest in an economic destabilisation inTurkey. But everything must be done to ensure an independent central bank,. | “No one has an interest in an economic destabilisation inTurkey. But everything must be done to ensure an independent central bank,. |
| Germany would like to see an economically prosperous Turkey. This is in our interest.” | Germany would like to see an economically prosperous Turkey. This is in our interest.” |
| The Turkish central bank has been restricted by Erdoğan’s opposition to higher borrowing costs (he believes they cause inflation, while most economists believe they restrict it). | The Turkish central bank has been restricted by Erdoğan’s opposition to higher borrowing costs (he believes they cause inflation, while most economists believe they restrict it). |
| Turkish interest rates are currently 17.75% -- very high by current standards. Some City experts, though, argue they should be hiked by over 1000 basis points (to around 27%) to prop up the lira. | Turkish interest rates are currently 17.75% -- very high by current standards. Some City experts, though, argue they should be hiked by over 1000 basis points (to around 27%) to prop up the lira. |
| And here’s Associated Press’s take on the Turkish leader’s speech earlier today. | And here’s Associated Press’s take on the Turkish leader’s speech earlier today. |
| Turkish President Recep Tayyip Erdogan says his country is under an economic “siege” that has nothing to do with its economic indicators. | Turkish President Recep Tayyip Erdogan says his country is under an economic “siege” that has nothing to do with its economic indicators. |
| During an address to Turkish ambassadors in the capital, Ankara, Erdogan said Monday that Turkey would overcome the “attack” on its economy. | During an address to Turkish ambassadors in the capital, Ankara, Erdogan said Monday that Turkey would overcome the “attack” on its economy. |
| He insisted that Turkey’s economy remains strong and said the currency would soon settle “at the most reasonable level.” | He insisted that Turkey’s economy remains strong and said the currency would soon settle “at the most reasonable level.” |
| In an apparent reference to the United States, Erdogan said “the bullies of the global system cannot roughly, shamelessly encroach on our gains that were paid for by blood.” | In an apparent reference to the United States, Erdogan said “the bullies of the global system cannot roughly, shamelessly encroach on our gains that were paid for by blood.” |
| The Turkish leader’s comments came after authorities launched investigations into hundreds of social media accounts for alleged reports they claimed were helping the currency’s plunge. | The Turkish leader’s comments came after authorities launched investigations into hundreds of social media accounts for alleged reports they claimed were helping the currency’s plunge. |
| Erdogan said there is an “economic terror” being waged on social media, adding that “traitors” would be punished. | Erdogan said there is an “economic terror” being waged on social media, adding that “traitors” would be punished. |