Most people only became aware of the dire situation of the Turkish lira (TRY) late last week, when the “collapse” and “crisis” made headlines in the general media and came to totally dominate the financial media.
That’s understandable from a news point of view, because what happened to the TRY on Thursday and, most especially, its spectacular implosion on Friday – when it moved from a (record-low) close on Thursday of 5.55 to the dollar to 6.62, before closing at 6.51 – was truly extraordinary.
Add to that the cack-handed contribution of the European Central Bank to the rapidly-worsening crisis – the ECB helpfully highlighted the fact that several major European banks have significant exposure to Turkish debt – and it’s pretty obvious why markets around the world went into a funk.
More ‘helpful’ still was the tweet from POTUS that he was doubling the recent tariffs levied by the US on Turkish steel and aluminium exports. This was understood by the general media to be the cause of the intensified slump, thanks in no small part to Trump’s inane comment that relations between the US and Turkey were “very bad.”
However, the Turkish crisis did not start on Friday, or Thursday, or last week at all. It has been underway, and getting steadily worse, for some time – visibly for months, but in fact for much longer. Thus Trump did not cause it and his tariffs are not even a major factor, although – like most Trump moves – they carry considerable symbolic weight.
The collapse of the Turkish lira and the impending collapse of the Turkish banking system – and hence the threat of a general economic collapse – have been in the cards for a long time. Indeed they have actually been underway for some time, as the chart below shows. It is from a Bloomberg article from late May – before the recent election in Turkey – and relates to the steady slide in the TRY during May, which took it from 4.1 to the dollar on May Day to 4.8 three weeks later.
Indeed, any search for “Turkish lira” covering this year will be littered with “slump”, crisis”, “crash”, “crunch” and the rest of the relevant journalistic jargon, for July, June, May, April, in other words, long before the recent drama.
The same search will provide ample analysis of the factors behind this developing disaster – and Trump and his sanctions are not near the top of the list, if indeed they merit a mention at all. Rather, two key factors stand out.
One is that the Turkish economy, despite its enormous progress in the first decade of AKP/ Erdogan rule (from 2003), still has a major Achilles heel – its continued reliance on foreign funding. Put another way, Turkey suffers from a chronic deficit on its current account, which requires it to borrow from foreigners to keep moving ahead.
The second factor is not economic but political: the gradual ascent of Erdogan from the leadership clique of the AKP to ever-greater dominance in the party and country – accompanied by his steady descent into megalomania. His most recent electoral victory, which effectively made him president for life and gave him total control over the executive, as well as the legislative, branch of government was followed by the appointment of his son-in-law as finance minister and his elimination of the independence of the central bank.
As illustrated by the above chart, as well as considerable additional data all readily available, the events of last week are simply a rapid acceleration of an existing downward spiral. It is precisely for that reason that Trump’s move and his tweet are so stupid and counter-productive, even by his abysmal standards.
Seeing his adversary on the ropes, Trump could have made a helpful move, or even just a positive gesture, conditional on doing what Trump wanted (releasing the American pastor jailed by Turkey). But, being the slobbish bully that he is, he preferred to kick Erdogan as hard as he could.
The result, entirely predictable, is that Trump has given Erdogan an alibi – “the Americans are screwing us” – which may yet enable him to get himself off the hook for this disaster. Even if the crisis does result in Erdogan’s downfall, the Turkish public will believe that it was a foreign plot that brought him down – and a large number of non-Erdogan supporters will rally behind his successor out of patriotic sentiment.
Worse still, from an American perspective, the process already underway whereby Turkey is distancing itself from/ being pushed away by (choose your version) the West and into the waiting bear-hug of Putin’s Russia, will be given additional impetus. This will be the case even, perhaps especially, if Erdogan is forced to quit.
Meanwhile, if the Turkish crisis does spill over into Europe and the wider Middle East via the banking system and other financial channels, Trump will be blamed. The gathering backlash against the use and abuse of American financial power over the rest of the world – including supposed American allies – will gather steam.
The ability of the main political and economic powers to work together in the face of a crisis, which is eroding steadily, has just taken another hefty hit.