The LUMBerIng LIra

When politicians promote irrational economic policies, a currency meltdown is inevitable.

TURKEY’S EIGHT PER CENT inflation rate is at least 300 basis points above its central bank’s target. But the same central bank has been publicly berated and pressured by President Erdogan for not lowering interest rates, an act of political interference that erodes the legitimacy and independence of governor Erdem Basçi.

Despite the 50 per cent fall in Brent crude, Turkey’s current account deficit is six per cent, financed by borrowing short-term capital from abroad that makes the country vulnerable to offshore hot money capital flows.

The Gezi Park protests in Istanbul destroyed the ruling AKP’s record of political invincibility even though Erdogan won three general elections in 2002, 2007 and 2011. Turkey’s economic growth rate has plummeted from seven per cent in the first decade of AKP rule to a mediocre three per cent now. Turkey’s savings rate is a mere 14 per cent of GDP, and its banking system is saddled with a $300 billion consumer debt time bomb.

I had flagged the Turkish lira as a strategic short when skews in London foreign exchange option markets suggested that the smart money was

The Turkish central bank has now fallen below $40 billion and Turkish corporates have amassed $180 billion in US dollar debt. The Turkish lira’s fate could well be similar to the Mexican peso in 1994, the Thai baht in 1997 and the Indonesian rupiah in 1998.

bailing out of the lira. So it has not surprised me that the Turkish lira sank to record lows below 2.60 against the US dollar, down 12 per cent in 2015 alone.

The Asye Bank takeover and Citicorp’s decision to sell its strategic stake in Akbank, with a $800 million loss, both illustrate the deep fault lines in Turkish finance. The Turkish lira’s depreciation will accelerate once the Yellen Fed tightens US monetary policy this autumn. This makes a Turkish lira rate near 2.80 all too possible.

The Turkish lira’s free fall has created the risks of an “Asian flu” style financial crisis two months before June parliamentary elections. Turkish corporates have gone on a borrowing binge in the Euro markets and are burdened with $90 billion in maturing debt in 2015 to 16 alone.

This means that the risk of a major corporate default is now almost certain this summer or autumn. Turkish capex, consumer confidence and industrial output could lead to economic contraction by late 2015.

Turkish construction firm profits have been gutted by the geopolitical shocks