Turkey Currency Crash Contagion

Over the last few months, the heat has been growing on the Turkish economy and Turkish currency, the Lira.  To the extent that the Turkish Lira hit an all-time low today.

This has spread across markets like wild fire, with all major stock markets down and, at the time of writing 4pm, Germany is down nearly 2%, Brazil and other emerging markets are down 2%, France down 1.6%, UK and US markets down c 0.8%.

What is driving this?

Turkey has borrowed huge amounts of money for infrastructure build projects in Turkey.  Inflation is running at around 18%, interest rates at 17+% and fears mount for its ability to now pay its debts given that the USA has today slapped a 20% tariff on aluminium imports and 50% on steel imports, further rocking their economy and ability to repay government debt.

Contagion risk?

Turkey has borrowed much from banks in Europe.  This has caused market falls in euro banks exposed to Turkich debt and globally.  China is in debt, most of Europe, particularly Italy, have huge debts as does the UK and the US.  Government debt is known as ‘gilts’ in the UK and Government Bonds overseas.  With US tariffs threatening virtually every nation on the planet, are we on the bring of a 1987 Bond Market crash (Black Monday) which then triggered a stock market crash as investors rushed to sell stock market investments to cover bond market losses.  Russia is also suffering with sanctions after the Salisbury spy poison incident, will they retaliate with gas price hikes which will hit Europe?

Comment

Turkey has even asked its citizens to sell their foreign currency, in particular dollars and convert to Lira, this is a desperate measure that we believe will fail.  If you thought sterling was going to collapse, would you sell your dollars?  So we suggest:  Hold your breath!  It is not a rout yet but if Turkey needs a bailout to cover its debt borrowing, this could lead to contagion particularly in Italy, Spain and Portugal and possibly even France for a run on their debt position.  Could this be a return to 1980’s high debts, high inflation, high interest rates.

In addition, a strong dollar against other weaker currencies means US imports are cheaper and exports are more expensive. Hence, we believe trade tariffs to keep imports more expensive in the US.  Is Donald Trump protecting US jobs or is he looking to keep prices higher i.e. inflation to gradually devalue US government debt without ever repaying it?  We debate this in our next video on Monday.