Analysts warned that Turkey’s response had been inadequate and that the lack of effective countermeasures heightened the risk of contagion. David Cheetham, chief market analyst at foreign exchange firm XTB, said: “Calls from President Erdoğan for citizens to abstain from exchanging their currency for foreign equivalents and a statement from the Turkish interior ministry that they will look to take action against bad-mouthing the economy on social media are clearly not going to be enough to spark a recovery, and the longer this goes on without concrete steps being taken towards an amicable solution, the greater the risk of contagion.
“Other emerging market currencies such as the South African rand, the Argentinian and Mexican pesos and the Russian rouble are all looking vulnerable to further declines, while a benchmark of global emerging stock markets has fallen near to its lowest level of the year.”
Erdoğan calls on Turks to back lira by selling their dollars and euros
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Alastair George, chief investment strategist at Edison Investment Research, said: “While deft diplomacy cannot at this stage be ruled out to defuse the crisis, the US and Turkey remain on a collision course at present. Erdoğan is keen to play the possibility of support from other allies – perhaps Russia, China and Iran.
“This is therefore more than a domestic economic or political crisis but potentially a key geopolitical turning point in respect of Nato and Turkey’s relationship with the EU.”
Plunge in Lira, Turkey’s Currency, Fuels Fears of Financial Contagion
President Recep Tayyip Erdogan’s increasingly authoritarian rule in Turkey has fueled concerns about the country’s economic prospects.CreditTurkish Presidential Press service, via Agence France-Presse — Getty Images
Turkey’s currency fell to another record low on Monday, hitting stocks in Europe and Asia and raising fears that the country is on the verge of an economic meltdown that could spread to other emerging markets.The crisis, caused by soaring inflation, economic mismanagement by the Turkish government and tensions with the United States, has raised concerns over whether emerging economies that have benefited in recent years from foreign investment may also be vulnerable.
Rising interest rates in the United States and in Europe have made investors less tolerant of emerging markets. Foreign investors piled money into Turkish assets for years, lured by what appeared to be a stable economy and higher returns. But as interest rates rise in countries seen as safer, the relative attractiveness of riskier investments wanes. A crisis like the one in Turkey may be all it takes to send them fleeing.
Turkey’s central bank insisted over the weekend that it would “take all necessary measures” to preserve the country’s financial stability. But it has so far refused to raise interest rates, and the changes it has pushed through thus far have been limited in scope.
After the Turkish lira fell even further — one dollar bought 3.8 liras at the start of the year, but at one point on Monday it was worth 7.2 liras — investors dumped other emerging-market currencies. The Indian rupee dropped to a record low against the dollar, the Indonesian rupiah flirted with a three-year low, and the South African rand lost 2 percent after falling nearly 6 percent last week.
Stock markets across Asia, including in Hong Kong; Seoul, South Korea; Shanghai; and Tokyo, fell on Monday, with many exchanges dropping nearly 2 percent during the day. European markets fared only slightly better. The euro hovered around its lowest point against the dollar in a year.
The Standard & Poor’s 500-stock index lagged for much of the day, and closed down 0.4 percent. The Dow Jones industrial average fell 0.5 percent.- S.& P. 500+0.61%
- DOW+0.44%
- NASDAQ+0.58%
“Turkey’s woes can ripple out to hammer European Union institutions,” Carl Weinberg, chief international economist at High Frequency Economics in White Plains, N.Y., said in a note to clients on Monday.
Shares of European banks suffered some of the biggest losses, including BBVA of Spain and UniCredit of Italy, which have large holdings in Turkey, and lenders such as Commerzbank and Deutsche Bank, which do not have major operations there.
Investors were driven principally by fears of contagion, the notion that an economic or financial crisis in one country — in this case, Turkey — can quickly spread to other regions.
Problems in Turkey have been brewing for years, but Turkish assets have fallen steeply in recent days as questions have mounted over the country’s prospects. Price increases have quickened, and President Recep Tayyip Erdogan had undertaken increasingly authoritarian moves, from the appointment of a relative as an important minister to the erosion of the central bank’s independence.
Normally, a country in Turkey’s situation would raise interest rates to stifle inflation and stop the currency’s slide. But Mr. Erdogan’s popularity has hinged on rapid growth fueled by credit, and he has often spoken against raising interest rates.
Still, Turkey has political and economic problems not found elsewhere, and analysts were not yet ready to predict widespread panic.
“In the very short term, we are seeing what we would describe as ‘risk off’ toward emerging markets,” said Stuart Culverhouse, global head of macro and fixed income research at Exotix Capital, a research firm in London.
But “Turkey is following a path many other emerging markets aren’t,” he added. “I don’t think it’s going to lead to a more systemic problem across emerging markets.”
On Monday, Turkey’s central bank relaxed some of its rules on the money that commercial banks must keep on reserve, freeing up cash to deal with the currency crisis. The central bank also said that it would provide “all the liquidity the banks need.”
But it made no mention of raising the benchmark interest rate, which is already at 17.75 percent. Though high compared with other countries, it is only slightly above the rate of inflation and would have to be much higher to squelch rising prices.
In a speech in the city of Trabzon on Sunday, Mr. Erdogan called on businesses to show solidarity in supporting the lira.
“Do not prefer to rush to banks and buy foreign currency,” he said. “You would do the wrong thing if you resort to such options just to be on the safe side. You should know that it is both our and industrialists’ and merchants’ responsibility to keep this nation on its feet. Otherwise, we would have to implement Plan B or Plan C.”
Yet in a sign of nervousness in Turkey, rumors spread on social media that the Plan B or C would involve restrictions on foreign exchange bank accounts. The treasury and finance minister, Berat Albayrak denied the rumors in a post on Twitter late Sunday, and the semiofficial Anadolu news agency later reported that Turkey’s interior ministry had opened investigations into 346 social media accounts officials said had helped “manipulate perceptions” about the lira.
Compounding the fear in financial markets, there is a lack of information about which foreign banks may own Turkish government bonds or have lent money to Turkish companies. About 90 percent of Turkey’s public and private sector debt with foreign lenders is in foreign currencies, according to the International Monetary Fund.
Those debts in dollars, euros or other foreign currencies will quickly become unsustainable for borrowers that do not have corresponding revenue in those currencies.
A worsening diplomatic dispute with the United States has also piled on the pressure for Turkey. Though tensions initially centered on the detention of an American pastor, they have since spread into the trade arena.
President Trump pledged on Friday to double the rate of tariffs on steel and aluminum imports from Turkey. The comment, which was made in a Twitter post, spooked markets concerned that Mr. Trump could take a similar approach with other trading partners.
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!
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“The catalyst for market volatility has been geopolitical uncertainties and trade,” said Viraj Patel, a foreign-currency strategist at ING. “This is another knock for global markets and, taken together, it’s a pretty toxic environment.”
China’s currency, the renminbi, which has been a casualty of Mr. Trump’s trade policies for weeks, also weakened further against the dollar on Monday. The government in Beijing, which keeps a firm grip on the value of its currency, weakened the renminbi by 0.34 percent against the dollar, setting the benchmark rate for trading in Shanghai at its weakest level in 15 months.
China’s main stock index lost nearly 2 percent at one point on Monday, but it closed down 0.3 percent. The reaction was stronger in other Asian markets: In Tokyo, the main index fell 2 percent. Stocks in Seoul fell 1.5 percent. A broad index of Europe’s biggest companies was down 0.4 percent in afternoon trading.
A strengthening dollar is the biggest concern for officials in China and in other emerging markets. The upheaval in Turkey has fortified the dollar even further.
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Despite the panic in markets, one economist at Deloitte said he believed that uncertainty about Turkey did not signal a global contagion, yet. Turkey’s economy is only the 17th-largest in the world, and it is not as integrated into the global financial system as countries like China and the United States.
“I’m a little concerned, but I wouldn’t be pressing the panic button,” the economist, Xu Sitao, said.
Relations between Turkey and the United States suffered another blow Friday after President Trump announced via Twitter that he had authorized the doubling of tariffs on steel and aluminum exports from Turkey.
The deepening rift between the two NATO allies is over failed talks to release an American pastor who has been detained since 2016 on espionage charges.
Friday’s announcement comes nine days after Trump said the Treasury Department would impose sanctions on two Turkish officials. Here’s a look at the major players involved and an explanation of this geopolitical conflict:
U.S. pastor Andrew Brunson is escorted by Turkish police officers to his house in Izmir. (Emre Tazegul / Associated Press)
Pastor Andrew Brunson
Brunson is an evangelical preacher who has lived in Turkey for more two decades where he ran the small Izmir Resurrection Church in Izmir, a city on the Aegean coast in western Turkey. He was swept up in a massive dragnet in 2016 and accused of espionage after a military coup failed to topple President Recep Tayyip Erdogan.
The Turkish indictment against the 50-year-old pastor alleges he tried to convert Kurds living in Turkey to Christianity and engaged in “missionary activities under the cover of providing humanitarian aid to asylum seekers.” Whether or not true, those allegations bring together two feared subjects for the Turkish government: overt Christian proselytizing and work with the Kurds, many of whom desire independence from Turkey.
Brunson, his supporters and the U.S. government maintain the charges are bogus, and Trump has described Brunson as a hostage. “The disciples of Jesus suffered in his name, now it is my turn,” Brunson said during a court appearance last month. Brunson’s church belongs to the same large evangelical umbrella as Secretary of State Michael R. Pompeo’s Kansas congregation.
Brunson is a member of the conservative Evangelical Presbyterian Church, which has hundreds of churches across the U.S. A native of Black Mountain, N.C., he has lived and worked in Turkey with his wife and children, according to the American Center for Law and Justice, a D.C.-based legal organization that has advocated for his release.
"I've never done something against Turkey," Brunson said in a court hearing in April. "I love Turkey. I've been praying for Turkey for 25 years. I want the truth to come out."
Brunson’s next hearing is Oct. 12. He could face 35 years in prison if convicted.
Fethullah Gulen is an Islamic preacher who came to the U.S. in 1999 just ahead of a treason charge in his native Turkey. (@fgulen.com)
Fethullah Gulen
Gulen is the man the Erdogan’s government blames for the failed coup that unfolded on the night of July 15, 2016.
Gulen, a frail 75-year-old Turkish-born Muslim cleric who has been living in exile on a 26-acre compound in eastern Pennsylvania since the 1990s, vehemently denies any involvement in the coup.
Although he lives thousands of miles away from his home country, his teachings of Sufi Islam — a mystical branch that draws on ancient teachings — have inspired thousands of followers.
Based on Gulen’s religious, economic and political beliefs, his followers have created a global movement known as Hizmet that controls schools, companies and charities.
His critics, however, say Gulen is the head of a cult and blame him for trying to overthrow Erdogan’s government.
Relations between the U.S. and Turkey started to worsen when the U.S. refused to extradite Gulen in 2016.
Turkey's President Recep Tayyip Erdogan saluting supporters after Friday prayers, in Bayburt, (Murat Kula / AFP/Getty Images)
President Recep Tayyip Erdogan
Erdogan began his rule in Turkey in 2003 — first as prime minister, then president — as a relatively moderate conservative, having toned down his deeper Islamic tendencies in a Muslim country that fiercely defended its status as secular. But gradually he began to expand his power, eliminating the position of prime minister, placing loyal supporters in the judiciary, seizing or closing most independent media and repressing dissent.
Tens of thousands of people were arrested or fired in the aftermath of a failed coup in 2016; Turkey had more journalists in prison than any nation in the world. All the while, Erdogan also injected more religion into in Turkey’s public life, reversing a status quo of nearly a century. He may be as talented as Trump is in brinkmanship, and he is a tough, wily negotiator. He is not above using Brunson as a bargaining chip — and driving a hard bargain, at that.
President Trump and President Erdogan during the opening ceremony of the NATO summit July 11, 2018, in Brussels, Belgium. (Abaca Press / TNS)
President Trump
In keeping with his affinity for autocratic leaders, Trump started out forming a cordial relationship with Erdogan. Despite the misgivings of many in the administration about the country’s human rights record, Turkey remained an important partner in the fight against terrorism.
Trump telephoned to congratulate Erdogan on his victory in a referendum last year that most observers considered a sham and a thinly veiled attempt by the president at consolidating authoritarian power. And Trump has been exceedingly friendly with Erdogan at international meetings.
But it is the case of the detained American preacher — despite being a relatively narrow issue — that has captured Trump’s attention and heightened tensions between Ankara and Washington as Trump wields his presidential powers as an economic tool. In April, Trump again took to Twitter to ask for his release: “Pastor Andrew Brunson, a fine gentleman and Christian leader in the United States, is on trial and being persecuted in Turkey for no reason. They call him a Spy, but I am more a Spy than he is. Hopefully he will be able to come home to his beautiful family where be belongs!”
One reason for Trump’s interest might be the preacher’s appeal as a cause celebre among evangelical Christians in the United States.
Vice President Mike Pence has asked for a jailed pastor to be released in Turkey (Saul Loeb / AFP/Getty Images)
Vice President Mike Pence
Pence has repeatedly called for the pastor’s release and in July threatened Turkey with sanctions unless it took “immediate action” to free him.
Pence spoke passionately about Brunson in late July to a crowd at a State Department conference on religious freedom. “As we gather today there is one victim of religious persecution that bears mentioning as well,” Pence said. “He is an innocent man. There is no credible evidence against him.”
During the speech Pence revealed that he had spoken with the detained pastor and said he reassured Brunson that the Trump administration was working to secure his release. Brunson’s daughter, Jacqueline Furnari, was also in attendance and Pence addressed her in his remarks: “As I told your father yesterday … President Trump and I will continue to fight to secure your father’s full release until he is restored to your family and returns to the United States of America.”
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