On Friday only, the Turkish currency sometimes lost 13% to the dollar. In March, the dollar cost 3.8 lira, and today it was even 6.3 lira. The press reports about the concerns of the European Central Bank have worsened dramatic events in the local market - writes Marcin Lipka, Conotoxia Senior Analyst.
The situation of the Turkish lira has been fatal for months. It has been negatively affected both by the diplomatic conflict between Washington and Ankara and by disastrous economic governance. The central bank was dependent on the executive, which caused an uncontrolled increase in inflation and growing concerns among foreign investors.
Concerns about the economy condition were intensified by growing costs of debt service (profitability of 10-year treasury bonds exceeded 20%) and a huge current account deficit (about USD 50 billion annually), which is becoming increasingly difficult to finance with the falling value of the Turkish currency.
The fuel to the fire was added by the “Financial Times” reports, which on the basis of information from the European Central Bank, claimed that monetary authorities in the euro area were concerned about the credit exposure of euro area banks to the Turkish market.
The terrible day for the lira
The article from the “Financial Times” overestimated the euro and European banks, but there were limited changes comparing to what happened with the lira. Investors quickly realised that the real exposure of Italian, French and Spanish banks was not that dramatic, and was less than EUR 20 billion, EUR 40 billion and EUR 80 billion respectively, and was unlikely to undermine the eurozone as a whole.
The reports of the Financial Times and the ECB's concerns have plunged the lira. Literally within a few dozen minutes, the Turkish currency lost 10% of its value, increasing the daily price cut to 13%.
The total depreciation of the lira since September last year is similar to the maintenance of the currency of the banana republic. Less than a year ago, around 4.2 lira had to be paid for the euro (roughly the same as for the euro expressed in zloty). In March, the limit of 4.70 lire was crossed. At the end of May, the level of 5.50 was forced through, and at the beginning of this week - 6.00. Today, however, at the climax of the discount, the value of 7.20 has been reached.
A what is the local authority doing about it?
Turkish society is probably not only shocked by the falling value of the local currency. No less surprising is the fact that the authorities, which were very active earlier, have relatively limited comments on economic issues.
In recent months, President Erdogan has repeatedly called for the public to sell dollars. But if people did, their current assets would be tens of percent smaller.
Today, however, during a speech in his province (Rize), the Turkish President was supposed to say 'Do not forget this: if they have dollars, we have our people, our rights, our Allah'. - The Bloomberg news agency wrote quotes published by the state media.
Apart from the historical changes in the course of events, the lira in Turkey have a sad social dimension. The country was on the way to further strengthening its position on the market of developing economies. However, this positive trend has been marked by cracks for several years, and these cracks are now turning into a real crisis, which may end up with stagflation (economic stagnation and high inflation), which is fatal for households or a deep recession.
It will also be extremely difficult to restore confidence in the country, even if appropriate reforms are initiated (e.g. with hypothetical support from the International Monetary Fund). The costs of all these negative events will be met by the Turks, who will pay for years for the uncontrolled growth in public investment, the strong stimulation of credit and the loss of real competitiveness for the economy as a whole.