Turkey's lira crisis: How bad can it get?

11 August, 2018, 20:38 | Author: Sally Reid
  • Andrew Brunson an American pastor is released to home detention last month in Izmir Turkey

Trump said Friday on Twitter that he authorized a new 20 percent tariff on aluminum and 50 percent tariff on steel from Turkey.

The United States placed sanctions on two Turkish officials earlier this month because of Brunson's case.

Turkey vowed retaliation "without delay" and warned the move would further harm relations between the two allies. The lira fell further after Mr Trump's tweet.

Relations between Washington and Turkish President Recep Tayyip Erdogan also have worsened because of the detention of three locally employed USA consular workers, trade matters and differences over Syria.

The lira tumbled about 10 per cent on Friday to another record low as investors worry about Erdogan's unorthodox economic policies and United States sanctions.

The lira, which has always been falling on worries about the government's influence over monetary policy and the USA tensions, plunged more than 18 percent at one point on Friday to a record low against the dollar.

"This is a national, domestic battle". Like many other countries around the world they are at odds with the Trump administration and have been hit with USA sanctions.

Earlier on Friday the lira plunged as much as 14 percent on as worries about Erdogan's influence over monetary policy and worsening USA relations snowballed into a market panic that also hit shares of European banks.

As the currency weakens, it can make foreign investors pull their money out of Turkish stocks and bonds as their lira investments lose value.

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Axios reported that the Turkey is trying to lessen their dependence on Russian Federation, and the increased sanctions will make their goal more challenging to reach. The economic options include a central bank intervention by raising interest rates, although this would have a temporary effect, and Erdogan is famously hesitant to raise rates. Trump, who had secured the release of a Turkish woman activist being held by Israel and just days earlier he had been exchanging fist bumps with Erdogan at a North Atlantic Treaty Organisation summit in Brussels, took it as a personal affront.

Markets are deeply concerned over the direction of domestic economic policy under Erdogan with inflation at almost 16 per cent but the central bank reluctant to raise rates in response.

Turkey's woes have been aggravated by investor worries about the economic policies of Erdogan, who won a new term in office in June with sweeping new powers.

Securing the release of Brunson, arrested in 2016, is a top priority for the United States, and it is also tussling with Turkey over the detention of three locally employed US embassy staff, trade issues and differences over Syria. Rate increases are the central bank's main tool to support the currency and fight inflation. On Friday, he said the country had to take steps in answer "to those who have waged an economic war against us".

The lira was trading at 6.47 to the dollar at 1900 GMT, a loss on the day of 16.6 per cent.

Erdogan spoke briefly Thursday night and alluded to problems with the currency, saying "various campaigns" were underway, adding: "If they have dollars, we have our people, our righteousness and our God".

"Making a speech like Albayrak's in the midst of a currency free fall without a single concrete measure shows utter lack of comprehension about what's happening and what's required", tweeted Harvard economist Dani Rodrik.

Treasury and Finance Minister Berat Albayrak has vowed to execute Turkey's new economic model together with "all national and worldwide stakeholders", while stressing that a "decisive" approach and the Central Bank's independence would be maintained.

He said: "It is wrong to dare bring Turkey to its knees through threats over a pastor".

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