Turkey’s currency crisis deepened today, with the lira touching new lows against the dollar.
What began as a spat with Washington over the detention of an American pastor is turning into a full-blown financial debacle as investors fear the country’s economy is sinking into chaos.
The lira touched 15 cents to the US dollar today, having been worth more than 26 cents earlier this year.
British bank exposure is high
While the strengthened against the pound and the euro this morning, the was weaker against both following reports that the European Central Bank is concerned at the exposure of eurozone banks to Turkey.
With much lending by Turkish banks to local companies denominated in US dollars, there are fears those borrowers may be unable to repay what they owe given their earnings are likely to be overwhelmingly in devalued lira.
, a traditional safe haven in times of trouble, failed initially to benefit from Turkey’s crisis, dropping 3.85 cents to the ounce to $1,211.65. Oil, always sensitive to developments in or close to the Middle East, was a little higher, with gaining 10 cents to take the price to $72.91 a barrel.
Turkey’s central bank has pledged to provide the country’s banks with all the liquidity they need to ride out the crisis, and President Recep Tayyip Erdogan has spoken of a plot to bring Turkey “to its knees”.
The immediate because of the US-Turkey dispute is the two-year detention of pastor Andrew Brunson, accused by the authorities of links with both the outlawed Kurdistan Workers’ Party and with the movement accused of organising the failed coup attempt of 2016.
IMF warns economy is “overheating”
Ratcheting up the tension between the two NATO allies was President Donald Trump’s approval of the doubling of tariffs on Turkish aluminium and steel.
But the slide in the lira and the consequent fears about the ability of Turkish companies to repay what they owe has exposed deeper concerns about Turkey’s economy, which has enjoyed boom conditions recently.
The IMF added: “Monetary policy appears too loose and its credibility is low; and on- and off-budget fiscal policies…are expansionary and risk undermining Turkey’s hard-earned fiscal credibility.”
“As a result, the economy faces internal and external imbalances: a positive output gap, inflation well above target, and a current account deficit of more than 5% of gross domestic product.”
Given Turkey’s strategic importance, straddling east and west, and its role as a major regional economy and military power, the latest developments spooked markets across Europe, with London’s down 0.46% in morning trading at 7,631.56. There were also falls in , , and Madrid.