TURKISH CURRENCY MELTDOWN THREATENS EUROPE - Soul 2 Soul Mates Blog

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8/10/2018

TURKISH CURRENCY MELTDOWN THREATENS EUROPE

TURKISH CURRENCY MELTDOWN  THREATENS EUROPE
Worries over a fragile Turkish economy and the risk of contagion in Europe unnerved investors on Friday and sent the lira to a record low against the US dollar.

The Turkish currency plummeted as much as 17% against the dollar, reflecting a range of concerns, including tensions with the United States and the unwillingness of Turkish authorities to raise interest rates.
President Donald Trump, who imposed sanctions on senior Turkish officials earlier this month for their role in the detention of an American pastor, upped the stakes on Friday with a promise to increase metals tariffs on Turkey.

Turkish President Recep Tayyip Erdogan was defiant.

"Don't forget this: if they have dollars, we have our people, justice and God," he said. "We will come out of the economic war successfully."

The rhetoric did little to calm markets. The lira, which has dropped almost 40% against the dollar this year, resumed its slide as Erdogan spoke.

Related: Turkey could be the next emerging market crisis

Rodrigo Catril, a senior currency strategist at National Australia Bank in Sydney, said investors are increasingly worried about rising inflation and the ability of the country's central bank — whose independence has been questioned by investors — to do anything about it.

The central bank has been under pressure from Erdogan, who was re-elected in June, to keep interest rates low despite inflation that topped 15% in July.

It went against market expectations and left policy unchanged at its more recent meeting. That may have pleased Erdogan, but economists say the central bank is now likely to be forced to take emergency action.

"There are reasons to think that emergency interest rate hikes during the current currency crisis might only provide fleeting relief," said William Jackson, chief emerging markets economist at Capital Economics.

"It's not clear that Turkey will be able to step back from the brink this time around," he added.

The government has already slashed its growth forecast for this year to 4% from 5.5%, but economists warn the slump will be much worse if confidence is not restored quickly.

"A recession and a debt crisis that would force Turkey to implement capital controls and ask for an [International Monetary Fund] bailout cannot be ruled out anymore," said Carsten Hesse, European economist at Berenberg.
President Donald Trump, who imposed sanctions on senior Turkish officials earlier this month for their role in the detention of an American pastor, upped the stakes on Friday with a promise to increase metals tariffs on Turkey.

Turkish President Recep Tayyip Erdogan was defiant.

"Don't forget this: if they have dollars, we have our people, justice and God," he said. "We will come out of the economic war successfully."

The rhetoric did little to calm markets. The lira, which has dropped almost 40% against the dollar this year, resumed its slide as Erdogan spoke.

Related: Turkey could be the next emerging market crisis

Rodrigo Catril, a senior currency strategist at National Australia Bank in Sydney, said investors are increasingly worried about rising inflation and the ability of the country's central bank — whose independence has been questioned by investors — to do anything about it.

The central bank has been under pressure from Erdogan, who was re-elected in June, to keep interest rates low despite inflation that topped 15% in July.

It went against market expectations and left policy unchanged at its more recent meeting. That may have pleased Erdogan, but economists say the central bank is now likely to be forced to take emergency action.

"There are reasons to think that emergency interest rate hikes during the current currency crisis might only provide fleeting relief," said William Jackson, chief emerging markets economist at Capital Economics.

"It's not clear that Turkey will be able to step back from the brink this time around," he added.

The government has already slashed its growth forecast for this year to 4% from 5.5%, but economists warn the slump will be much worse if confidence is not restored quickly.

"A recession and a debt crisis that would force Turkey to implement capital controls and ask for an [International Monetary Fund] bailout cannot be ruled out anymore," said Carsten Hesse, European economist at Berenberg.



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