“They have their dollar, we have our God.”
Turkey’s president declared today that “we will not lose the economic war,” but Recep Tayyip Erdogan is certainly not winning it. Prospects grew even dimmer after Donald Trump literally doubled down on sanctions earlier announced against Turkey, in response to a failed deal to free Pastor Andrew Brunson and Erdogan’s lurch towards Islamist dictatorship. Trump gleefully noted the Turkish lira’s crash on world markets in his announcement on Twitter:
I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!
— Donald J. Trump (@realDonaldTrump) August 10,2018
Trump’s not kidding about the lira, which has dropped a third of its value this year:
Turkey’s embattled lira on Friday hit new record lows against the US dollar and euro, losing over seven percent in value as strains with the United States showed no sign of abating and fears grew over the exposure of European banks.
The lira was trading at 5.95 to the dollar, a loss on the day of 7.5 percent. Earlier, it had crashed some 12 percent through the 6.00 level for the first time in history, trading at one point at more than 6.20 lira per dollar.
The lira has now lost over a third of its value against both the dollar and the euro this year, with the currency battered by both concerns over domestic economic policy and the political situation.
Erdogan responded by telling Turks to, er, dump their hard currency, making an explicit call to religious faith in the move:
“There are various campaigns being carried out. Don’t heed them,” Erdogan said Thursday. “Don’t forget, if they have their dollars, we have our people, our God. We are working hard. Look at what we were 16 years ago and look at us now,” Erdogan told supporters.
On Friday afternoon Erdogan dug in again, calling for citizens to convert out of dollars and gold and buy the lira to help fight a “national struggle”. In response, the currency renewed its sell-off. In his speech in the northeastern city of Bayburt, Erdogan added that he would decisively defend the country against economic attacks.
How did that work out? About as well as you’d imagine:
Erdogan: “If they have dollars, we have our people, our righteousness and our God” Market: pic.twitter.com/ee9MRkSmxd
— Rahul Sahu (@iRahulSahu) August 10,2018
That indicates that people are buying dollars and euros, not selling them off — and that they’re not finding buyers in lira, anyway. Erdogan doesn’t have many options left, and those that remain are not likely to look palatable to a strongman who just recently took personal control of the economy:
Paul Greer at Fidelity International said dramatic interventions were now needed as Turkey faced a “downward spiral” of investor confidence.
These could include the appointment of “pragmatic technocrats” and severe fiscal austerity to address high debt levels.
An immediate “aggressive interest rate hike” was also needed, Mr Grier said, with something of the order of 1,000 basis points as seen in Argentina this year. Such a move would slow the country’s economy down, after it had overheated considerably.
Some economists have suggested that capital controls may be imposed; these are limits on the money that can move in and out of a country.
These alone will not be enough shore up the economy, but they might help address the problem of capital flight.
If Erdogan doesn’t do something fast to correct the situation, the Turkish populace might start thinking of fixing it themselves. The next coup attempt might not be a false-flag operation. Reneging on the Brunson deal has turned out to be a lot more expensive than Erdogan estimated.