Markets and investors await Erdogan's response to lira crisis

Lloyd Doyle
August 10, 2018

Turkey's lira hit a new record low against the U.S. dollar in early trade on Friday, as concerns over a widening rift with the United States persisted after a Turkish delegation returned from talks in Washington with no apparent solutions to the crisis.

The Turkish lira has fallen to a new record-low this morning, as much as 12 per cent in one day, amid the souring of diplomatic relations with the USA and a deepening monetary policy crisis.

He is facing up to 35 years in prison if found guilty of supporting the coup to overthrow President Recep Tayyip Erdogan. The currency has lost 30 per cent of its value this year, most of that since Mr Erdogan retook office with hugely expanded powers a month ago.

"We are entering into a balance-of-payment crisis here", said Cristian Maggio, head of emerging market strategy at TD Securities in London.

President Erdogan made his comments while addressing supporters in Rize
Image President Erdogan made his comments while addressing supporters in Rize

"Furthermore, diplomatic tensions between the United States and Turkey are increasing as Turkey has refused to free the American priest, Andrew Brunson, who Erdogan claims to be a part of the failed coup attempt in 2016".

Ankara is turning towards China to overcome what Erdogan said were "subjective evaluations" from ratings agencies. "The fresh negative round of news started when the central bank decided not to hike the interest rates at its monetary policy meeting on 24 July - a big disappointment as the weak TRY increases inflation, which in turns weakens the lira and creates a vicious circle". "The Finance Ministry may provide some insights into its "New Economic Model" later today - perhaps with reference to budget deficits to address fiscal imbalances", says Viraj Patel, a foreign exchange strategist with ING Bank N.V. Though this is four times larger than Greece, it is still "less than half the size of the Italian economy, despite Turkey's larger population of around 80 million versus around 60 million for Italy", according to the analysis.

And even if eurozone exports to Turkey fell through the floor, previous experience has shown that European companies are "pretty quick in identifying and switching to new markets".

Obviously a real Turkish crisis would have knock-on effects, though Berenberg sees Europe's exposure to Turkish banks as being too small to cause much harm. "This is one of the most important principles of the free market economy - if you lend money, you take a risk and must accept the losses".

Other reports by Iphone Fresh

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