Turkish Currency Crisis May Hit Global Markets

Pastor Andrew Brunson is a character at the center of this escalating conflict which threatens to impact not only already damaged Turkish economy but is likely to cause great damage in Europe and emerging market economies.
He was arrested in October 2016 on charges of espionage and terrorism and has been held captive for nearly 2 years now. On Monday (August 21), Trump demanded Erdogan to release Brunson in hopes that after the US helped to release captive Turkish citizen in Israel, he would cooperate and release US citizen being held in Turkey. President Trump said that “there will be no concessions” to Turkey from now on.

Impact

On the 10th of August, Trump has authorized a doubling of tariffs on Steel and Aluminium imports. It has caused Aluminium to fall down by 20 % and steel fell down by 50%.

The lira has lost a fifth of its value against the dollar this month, further fuelling inflation, increasing the burden of foreign-currency debts and threatening the health of Turkey’s banking system. Turkey is one of the so-called “fragile 5 economies” along with India, Brazil, Indonesia and South Africa. For many experts, Turkey’s crisis is a warning sign for emerging economies, especially in Asia, as they share some of Turkey’s feature like heavy reliance on foreign borrowing and high inflation.

Recently, investors have started to pull their funds out of the broader emerging markets in fear that they may share the same fate as Turkey’s damaged economy. For instance, India’s and Indonesia’s currencies hit their lowest levels in recent years previous week.

Bank stocks in U.S., Europe, and Japan were also hit. For instance, some major European banks like Spain’s BBVA and Italy’s UniCredit, which have units in Turkey, last week suffered their shares fall by 3.3 percent and 4.6%.

Turkish banks are in a drastic situation right now because companies have accumulated a lot of foreign debt and the more its currency, lira, falls – the more expensive the debt gets to pay off.

What is the solution?

Recently, Turkish economy has received a 15 billion investment from Qatar who decided to support Turkey against U.S sanctions. Qatar’s Emir Sheikh Tamim bin Hamad Al Thani made the announcement Wednesday, saying the move was his way of standing by “brothers in Turkey”.

Russia has also offered aid to Turkey, as the country agreed to use the lira for settlements in bilateral trade instead of the dollar. State-run Industrial and Commercial Bank of China signed a US$ 3.8 billion financing agreement with Turkey in late July. At the same time, the European Union remains Turkey’s largest trading partner.

According to Donald Trump’s security adviser John Bolton, Turkey can end this conflict “instantly” by freeing pastor Brunson. Bolton stated that Turkey made a serious mistake by not realizing captive American citizen. Every day goes by that this mistake continuous will put Turkey deeper in the crisis.

Conclusion

It seems that it is now up to Turkish president Tayyip Erdogan to decide where he wants to go from this point. Next few weeks will show is this conflict is likely to be resolved soon or not.