Issue of the week: the Turkish lira crisis
The fright in emerging markets may have been triggered by Turkey, but it is not the cause
August “always carries an extra risk for markets” as trading floors thin out, said the FT. “And this year, the plunging Turkish lira has delivered a real crisis.” Although Turkey’s problems are “largely homemade”, investors have been “quick to exact punishment” elsewhere. European banking stocks fell, reflecting fears that some EU banks could suffer significant losses on loans to Turkish businesses. But the biggest hit has been taken by other emerging markets. Currencies such as the South African rand, the Indonesian rupiah, the Argentinian and Mexican pesos, and the Russian rouble have suffered heavy declines, as have emerging-market stock indices. “Contagion is a word being thrown around a lot,” said Jane Foley of Rabobank. The lira’s slide is “really turning the screws”.
What’s underpinning the panic? In a nutshell, rising US interest rates and the strengthening dollar, said Ambrose Evans-pritchard in The Daily Telegraph. “Every hedge fund in Mayfair knew that Turkey”, whose total foreign currency debts had reached 55% of GDP, “was an accident waiting to happen.” It was “odds-on favourite” to be the first of the big emerging market economies – along with Argentina – to face trouble as the US Federal Reserve raised interest rates and drained the pool of global dollar liquidity. “All it required was a catalyst.” That came when President Erdogan stopped the Turkish central bank from raising interest rates to stabilise the lira, and then had his “fatal” political clash with Washington. Turkey is “the first big victim of Fed tightening, but it’s unlikely to be the last”. Plenty of countries drank deep from the spigot in the “halcyon days” of zero rates, when “dollar funding was irresistibly cheap”. This is the start of “a long and painful hangover”.
Some analysts still reckon this could be a one-off rout largely confined to Turkey, said Bloomberg. Few other emerging markets “have exactly the same toxic blend” of troubles, and most have governments prepared to deploy “conventional monetary policy” to counter currency falls. Turkey is certainly “in a class of its own”, said Larry Elliott in The Guardian: its $300bn of dollar-denominated corporate debt “makes it particularly vulnerable”. But its problems aren’t unique. The real issue is the strength of the dollar, not Turkey, said John Authers in the FT. Just look at gold. The price of this traditional safe haven has barely budged despite the turmoil, suggesting that “investors in emerging markets now feel it necessary to buy dollars rather than gold”. Even if Turkey manages to halt its own crisis, it won’t “halt the contagion” – because that “stems from the strong dollar and the re-evaluation of emerging market assets that it has forced on investors”.