Turkish Lira in crisis as contagion spreads

The Turkish Lira fell to record lows over the weekend and spill over effects are being felt throughout Asia and Europe after increasing tensions with the US and an unexpected doubling of US tariffs on Turkish metal imports.

US president Trump made the announcement on twitter on Friday evening, after negotiations for the extradition of US pastor Andrew Brunson – who is accused by Turkey of being involved in the failed Turkish coup attempt in 2016 – appear to have failed. In return the Turkish government is seeking the extradition from the US of Fethullah Gulen, an exiled cleric who is accused by Turkey of organising the failed coup, but the US has rejected the request. 

The Lira fell 16 percent on Friday but on Monday recouped some of its losses as the Turkish Central Bank announced measures to prevent further freefall of the currency, reports Reuters. The central bank has said it will provide liquidity, cut foreign currency reserve requirements for Turkish banks and take other necessary measures to maintain financial stability.

Without giving details, Finance Minister Albayrak said on Sunday that from Monday Turkey will implement an economic plan in order to ease investor concerns – aside from the banking measures, no further announcement has been made.

As reported in the Singapore Times, contagion risks due to exposure to the Turkish market have caused Asian stock markets to fall  –  MSCI’s Asia -Pacific index was down 1.6 percent; China’s blue chip index fell 1.5 percent; Hong Kong stocks fell 1.6 percent; the Nikkei lost 1.7 percent and the Australian dollar fell 0.2 percent against the dollar. Europe’s markets also slid at opening on Monday and the FTSE 100 dropped slightly compared to Friday. The ongoing effects are still unfolding.

Both Erdogan and Albayrak have said that the fall of the Lira is as a result of a co-ordinated political and economic attack against Turkey and does not reflect the country’s economic fundamentals, according to the Hurriyet Daily News. This analysis is questionable as economists have repeatedly urged that Turkey’s economy is at risk of overheating due its loose monetary policy and low interest rates coupled with high inflation, and the fact that the currency has already fallen more than 40 percent this year over concerns of Erdogan’s increasing control over the economy and deteriorating relations with the U.S and other Western nations.