Daily Management Review

Turkey In Deep Financial Crisis, Fears Of Contagion Emerge


08/12/2018




Turkey In Deep Financial Crisis, Fears Of Contagion Emerge
Tremors were sent throughout the global markets on Friday after Turkey officially entered a full-blown financial meltdown following the refusal by the country’s President Recep Tayyip Erdogan to cow down to the market pressures and political pressures from the US.
 
The weakness of the Turkish economy became evident in the fall out after the country had followed year of a growth-at-all-costs economic policy which resulted in foreign debts of billions of dollar for its companies. On Friday alone, there was a drop of as much as 17 per cent in the country’s currency lira with a total loss of 42 per cent for the currency so far this year. the situation also raised the potential and concerns of a contagion into Europe as well as into other emerging markets.
 
The economic fallout was apparently sparked off by U.S. sanctions against Turkey for imprisonment of an American pastor. But a large number of economists and investors say that the Turkish economy worth $900 billion was already in a bad state and only needed a trigger. The sell-off denoted a complete leak of confidence of investors on the new system of government where president Erdogan had got himself unrivaled authority which completely had made the bureaucracy of no use.
 
“This is a textbook currency crisis that’s morphing into a debt and liquidity crisis due to policy mistakes," said Win Thin, a strategist at Brown Brothers Harriman & Co. in New York. “The way things are going, markets need to be prepared for a hard landing in the economy, corporate defaults on foreign currency debt, and possible bank failures.”
 
Safety in developed nations’ bonds were sought by investors seeking to avoid riskier assets after fears of contagion emerged because of the turmoil in Turkey. There was a rally in treasuries and bunds. There was a fall in global stocks and in South Africa’s rand and the Argentine peso. There was a drop of 1.2 per cent in the euro against the US dollar because of concerns of the exposure of the EU to the Turkish banks.
 
The Turkish economy can now be brought on track only by extreme measures, say investors. For example, there are discussions in private parlance in Turkish power and financial corridors about measures like an international bailout or implementing of capital controls which were taboo topics earlier. panic was also noted among a section of Turkish citizens. Reports from the country said that there was high demand for foreign-currency withdrawals in the different banks of the country and especially in its capital Istanbul. There were also reports that the banks are complaining of shortage of cash.
 
There was a negative impact of two speeches by Erdogan and another by his son-in-law who is also the finance minister of the Turkey. Both the  speeches were apparently intended to calm the markets. While avoiding the mention of United States President Donald Trump and any statement that could escalate the tensions with the U.S., Erdogan’s speech highlighted his defiant stance of resistance to any form of financial attacks. .
 
(Source:www.bloomberg.com)






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