Currency crisis alarm bell
TUrkey’S currency is still in free-fall. The lira has fallen by one-fifth against the dollar and, despite intervention by the Turkish government yesterday, slumped to its lowest level against sterling on fears of contagion.
Like most currency crises, this one has been bubbling away in the background for months.
even before this rout, the lira has been the world’s worst-performing currency, falling by almost half against the dollar in the past year because of concerns about the economy dropping off a cliff.
The trigger for this latest crisis is the stand-off between President Trump and his Turkish counterpart recep Tayyip erdogan following the White House’s strong-arm tactics in doubling US import tariffs on Turkish steel and aluminium.
Behind the trade dispute is a row over Turkey’s detention of a Christian evangelical pastor, Andrew Brunson. The pastor is facing terrorism allegations following the failed 2016 coup and his case has been taken up by religious conservatives in the US.
But the seeds of this crisis were sown years ago. Turkey’s inflation is soaring, there are high levels of credit and debt in the private sector, plus it’s running a whopping current account deficit. Inflation peaked at 15.9pc in July, while the construction sector, which has seen the most extraordinary growth and big foreign investment over the past decade, is bubbling over.
Investors are rightly concerned about the exposure of banks, including France’s BNP Paribas, Spain’s BBVA and Italy’s Unicredit, which have operations in Turkey.
Foreign investors have been losing trust in erdogan’s handling of the economy for months. But the final straw was when he installed his son-in-law at the ministry of finance in July as part of his bid to become the most powerful Turkish leader since Mustafa kemal Ataturk founded the republic from the ruins of the ottoman empire.
The big question for financial markets is whether Turkey’s problems can be contained domestically or whether they will spill over globally.
The fear is the lira’s crash will spark contagion not just in europe but among other more illiquid emerging market currencies.
The russian rouble, Australian dollar, South African rand, the Mexican and Argentine pesos are already wobbling.
It’s also August, always a volatile month for currency wars to break out. Not surprisingly, the Vix volatility index, measuring turbulence in the markets, jumped 16pc.
erdogan is resisting the more orthodox moves to stabilise the currency and dampen inflation with higher interest rates, hoping he can ride out the storm at home and telling Turks to sell their foreign currencies.
He’s also unlikely to seek any bailouts from the IMF, which believes Turkey has the lowest level of reserves among the emerging market economies, making it even more vulnerable to speculation. A troubled Turkey is not what anyone should want to encourage.
The danger is the more erdogan is dumped on by Trump and the West, the more likely he is to tighten his grip on the country.
Both erdogan and Trump are bullies. Trump is said to be furious that Turkey, a Nato member, bought its new missiles from the russians while erdogan is angry about US sanctions on Iran.
Is there room for manoeuvre? Perhaps. As Trump showed with North korea, his bark rarely turns into a bite, while erdogan needs foreign support.
There’s only one benefit to the lira’s fall – cheaper Turkish holidays. But the cost might be too high to pay in the long term.
Lucky seven
HOW many times can you start a business in the same industry, offering the same sort of deal, and make yet another fortune?
At least seven is the answer, and the man in question is Sir Peter Wood, surely one of the Uk’s canniest businessmen.
Wood is close to making a few more bob with the sale of his esure group to Bain Capital for about £1.2bn.
Wood, who revolutionised the insurance industry with Direct Line in the 1980s, will do nicely as he owns about a third of esure.
It can’t be an accident that the brains behind Sheilas’ Wheels, originally a womenonly insurer, has two ex-wives and six daughters. The policies come with handbag insurance. How genius is that.