Turkey’s lira meltdown is causing a global economic crisis on all four corners of the world – particularly in France and Spain where major lenders are at risk of losing substantial paybacks while President Erdogan’s debt rises.
The banking business in Turkey has been highly profitable for many years, which was also due to the economic policy of Turkish President Recep Tayyip Erdogan and through extensive guarantees, he stimulated private credit growth.
In contrast, the Turkish economy grew by 7.4 percent last year — quicker than financial growth champions China and India.
The banks that financed the boom were the beneficiaries of Mr Erdogan’s growth craze, and companies took up debt in dollars.
But now with every one percent the lira loses, the dollar debt automatically rises– as shown in a graph – meaning the first Turkish companies can no longer meet their financial obligations and have had to restructure their loans.
The lira slipped below 7.0 to the US dollar and was down 12 percent on Friday’s value at one point this morning.
The currency is collapsing after Donald Trump doubled import duties on steel and aluminium as part of fresh sanctions on the country.
The countries are embroiled in a diplomatic row sparked by the case of US evangelic pastor Andrew Brunson, which Turkey wants to try on terrorism charges believing he was behind the attempted coup on President Recep Tayyip Erdogan two years ago.
Central banks and emerging markets have gotten much smarter at using the tools at their disposal
The euro had already plunged after the tariffs were imposed on Friday, with the currency dropping to a 13-moth low this morning.
It has been a concern that the lira will affect European banks, mainly Spanish and French, because of the exposure of major European lenders to Turkish debt.
However, Elsa Lignos, Managing Director of FX Strategy, claimed the crash could still be judged as an isolated incident unlikely to cause a wider recession.
She told Sky News: “If you look at the case of Turkey, real interest rates are actually fairly positive given how high inflation is at the moment.
“So it’s not clear that investors are being rewarded for the risk that they’re taking.”
Asked if the current crush of the Turkish Lira could be compared to the early 1990s recession of emerging European countries, she said: “I think central banks and emerging markets have gotten much smarter at using the tools at their disposal to really complement what the government is doing.
“And find ways of squeezing the speculative positioning.
“So we sold out, for example, with CNH earlier last year and this year we’re seeing a similar kind of situation at the moment in several other currencies and we may see the same in Turkey.”