Black Friday was clearly coming

As mistrust in economic policies and the new system remains unabated, the burgeoning problems with the USA have accelerated the hemorrhage of the Turkish lira. The dollar made an all-time high yesterday at 6.8703 lira. With the exchange rate rising by 23.3% in one day, this increase was down to President Tayyip Erdoğan’s “economic war” rhetoric and the poorly received economic model that Treasury and Finance Minister Berat Albayrak announced, compounded by US President Donald Trump’s prclaimed sanctions in the evening.

 Policies collapse

 Despite the rulership’s “local-national struggle” rhetoric, according to economists, the plummeting Turkish lira is not due solely to heightening Turkey-US tension. The basic problem has its roots in the AKP’s economic policies, which have been criticised for some time. An economist, also pointing to the intensification of the political crisis, said, “The crisis of trust cannot be surmounted without a political solution. This involves not just US-Turkey tension, but the government’s policies in the areas of politics, the law and democracy. Politicians must come out and confront the realities of the market to re-establish trust. The cost of this confrontation in fact increases each day that steps are not taken.”

 Following a Financial Times report in the morning revealing that the European Central Bank had expressed concerns over European banks’ exposure to Turkey, the dollar shot up to 6.4915. The fall in the lira accelerated over the day. Yesterday, the Turkish lira recorded its sharpest one-day fall since the start of 2001. With the fall amounting to 82% since the start of the year, the decline has reached 94% since August 2017. This means that the dollar has more or less doubled in value since this date.

 Trump lit the fuse

 President Tayyip Erdoğan said in the speech he made yesterday in Bayburt, “Those who have gold, dollars and euros under the pillow should go and change them into Turkish lira at our banks. This will be my people’s response to those who declare economic war against us. Our togetherness is the biggest reply to the West. There is nothing they have not done to our country to bring it to its knees.”

 The dollar, which stood at around 5.90 before Erdoğan’s speech, rose to 6.25 as the speech progressed. The exchange rate, in the vicinity of 6.38 as Berat Albayrak delivered his speech, increased to 6.8703 after Trump announced that he had authorised a doubling of the tariffs on steel and aluminium applicable to Turkey.

 In parallel with the rise in the exchange rate, the compound interest rate on the ten-year bond peaked at 22.11%, as did the interest rate on the benchmark two-year bond at 24.8%. Turkey’s five-year credit default swaps broke through 400 points, the highest level since 2009. The euro increased to 7.9947 lira and Sterling to 8.9138. Intraday losses on the stock exchange extended to 7.5%. The Istanbul stock exchange ended the day down 2.31%.

 Crisis was clearly coming

 Head of Bilkent University’s Economics Department Professor Refet Gürkaynak, stressing that the tension between Turkey and the US over Reverend Brunson and the sanctions mandated by the Washington administration had no direct influence on the rapid rise in the exchange rate, said, “There are economic policies we have implemented since 2000. It has been obvious for a long time that it was going to be like this. If good economic stewardship is recognising crises in advance, everyone in Turkey was talking of this. This was a crisis that was clearly coming. The issue just now is how we are to surmount the stagnation.”

 Emphasising that a regime problem lies at the roots of the economic problems, Gürkaynak pointed out that the economy was not being managed successfully. Gürkaynak commented, “The administrators who are articulating ideas about economics have not all got there on a merit basis. With the current account deficit standing at 3.5% in the 1990’s, it has risen to ten. Debt is the thing that has triggered the crisis. We undertook construction with so much debt and we did this in a way that had no productive value. Now we are experiencing a crisis. When there is talk of, ‘We have our Allah,’ everyone construes this as, ‘Our affairs are in the hands of Allah’.”

 No escape

 Stressing that Turkey has serious economic problems, Refet Gürkaynak pointed out that major economic difficulties would be experienced as a consequence. Gürkaynak continued, “There is no escape. Difficulties will be experienced either because it is paid or cannot be paid. As ever, we see an ‘effect’ in the financial markets. As to the cause, this is ‘economic policy.’ A slow-down will come in its wake and certain sectors are more sensitive. For example, construction will come to an immediate standstill. So, the ensuing unemployment will be far greater. Turkey still needs to borrow. And for this reason we must gradually do things right in this country. We must say sensible things, not squabble and then furnish this country with an economic policy.”

 Growth running out of steam

 Following news of the European Central Bank’s concerns over European bank’s Turkey exposure, especially BBVA, UniCredit and BNP Paribas, Italian UniCredit, holder of a 41% stake in Yapı Kredi Bank, said in a report it published yesterday, “We are carefully following developments in Turkey.” In the report, which notes that “The credit-led growth model seems to be running out of steam,” it was stated that a sharp rise in funding costs has forced private and foreign banks to slow lending. The report notes the delay with which the Central Bank hiked interest rates and states, “Hikes may not be sufficient if macroeconomic policies remain loose and/or politicians undermine the Central Bank of the Republic of Turkey’s independence.”

 Nothing new said

 BlueBay Asset Management strategist Tim Ash said, “Nothing new is being said in Albayrak’s comments. For his part, Erdoğan’s comments are based on an agenda that brings nationalism further to the fore.” Ash pointed to the surprising absence of any data in the new economic model.

 Displayed rates change by the minute

 Activity levels in the gold and exchange offices in Tahtakale, known to be Istanbul’s informal currency exchange, varies by the second. Exchange offices are packed at times when the dollar starts rising. Citizens waiting with stacks of dollars in their hands change the cash as the exchange rate goes up. The office proprietors also bemoan the situation. The proprietors, indicating that citizens flood into the gold offices as gold prices rise, say that they cannot exchange the gold because they have no available cash.

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