Trump's tariff tweet inflames Turkey's economic crisis and strained US relations

Posted August 11, 2018

But Turkey is not manipulating its currency; the lira is falling because the country is suffering from an economic crisis.

President Recep Tayyip Erdogan is urging the Turkish people to exchange gold and hard currency into lira, after the currency hit a record low against the dollar today. So far they have remained conspicuously quiet, deciding not to step in and fight against the recent currency weakness. Together, that can weigh on the currency. It is astonishing that no matter how punished the Lira looks, traders are showing absolutely no indication that they are finished with pricing in "bad news" into the market.

He does have an understandable reason: Turkey has been holding an American pastor captive for 21 months, on grounds that the preacher was involved in the failed coup attempt against Turkish president Recep Tayyip Erdogan in 2016.

The new system also increased Mr Erdogan's control over the central bank, which on July 24 baffled markets by leaving rates unchanged despite inflation that in July came in at 15.85 per cent. He subscribes to the completely backward theory that lower interest rates cause lower inflation, which, now that he's given himself the power to pick the country's top central banker and made his son-in-law the finance minister, is actually being put to the test. Spoiler alert: It is not going well.

Q: What about the dispute with the U.S.?

The president is "not happy with Turkey's decision not to release Pastor [Brunson]", White House press secretary Sarah Sanders said. It had been billed as a state visit that would patch up frayed ties between two North Atlantic Treaty Organisation allies and potentially serve as a platform for Turkey to make overtures toward Europe after months of strained relations.

The New York Times suggested that Trump could also be trying to offset the effects of Turkey's weakened currency on the existing tariffs.

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United States investment bank Goldman Sachs alarmed investors with an assessment that a further drop in the lira to 7.1 to the dollar "could largely erode" the excess capital of Turkish banks. The U.S. was Turkey's biggest export market for steel a year ago, though exports have fallen since.

Economic experts believe the sharp fall of the lira is mainly because of concerns about the government's economic policies.

"Consequently, the risk of capital flight could see further Turkish losses in our opinion, whilst much higher interest rates could see a sharp economic slowdown and rising non-performing loans". So the sudden fall raises the possibility of corporate bankruptcies or bank failures that could hurt the economy.

"The Turks can export to many other countries, but with a weak lira, their products become cheaper to buy".

The Russian ruble this week plummeted to its lowest level against the dollar since 2016 as the USA said it was imposing more sanctions on Moscow over a chemical attack in the United Kingdom earlier this year.

Q: What impact could the turmoil have outside Turkey?

An important emerging market, Turkey borders Iran, Iraq and Syria and has been mostly pro-Western for decades. Any resumption of serious migrant flows from Turkey would be a big political issue in Europe, where opposition to immigration has fueled the rise of right-wing parties such as Itay's League and the Alternative for Germany. One economically-illiterate leader is crippling his own economy and blaming everyone else for it, which then turned out to be partially correct when another economically-illiterate leader chose to cripple their economy as payback for what they have done to themselves.

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In a tweet, he said he was imposing duties of 20 per cent on Turkish aluminium and 50 per cent on steel.

European shares fell on Friday as a dramatic fall in the Turkish lira jolted markets, with banks such as Spain's BBVA and Italy's UniCredit hit by worries over their exposure to Turkey.

Q: What is Erdogan proposing to do?

The Turkish president called on Turks to exchange dollars, euros and gold for Turkish lira.

Paul Greer at Fidelity International said dramatic interventions were now needed as Turkey faced a "downward spiral" of investor confidence.

McHugh reported from Frankfurt, Germany.

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