In this month alone, the lira has lost around a quarter of its value against the dollar and the euro.
(Photo: dpa)
Dusseldorf The fall of the Turkish lira on Tuesday brings back memories of the country’s currency crisis of three years. The Turkish currency sank to record lows against the dollar and the euro, and the daily losses were at times more than ten percent.
In return, the greenback rose above twelve lira for the first time, and the European common currency climbed above the 14 lira mark for the first time. In this month alone, the lira has lost around a quarter of its value against the dollar and the euro.
“This is the inevitable consequence of Erdogan’s war on interest rates,” Uday Patnaik, emerging market debt expert at Legal & General Investment Management, told the Financial Times. “The only thing that could stop the free fall would be a sign of an independent central bank in Turkey.
In August 2018, the currency crisis in Turkey had developed into a threat to the global economy. But that turned out to be mild, because the country on the Bosporus made a change in monetary policy and raised interest rates to 24 percent.
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But it does not look like a rethink in monetary policy at the moment. Another rate cut is likely to follow in December. In addition, as recently as Tuesday, Erdogan demanded “a“ competitive ”lira and defended the falling interest rates. An even weaker exchange rate should encourage investment and jobs. The President confirmed that he wanted to continue his “economic war of independence”.
Economists warn, however, that falling interest rates would fuel inflation, currently at 20 percent annually, and further destabilize the currency. According to the rating agency Fitch, 57 percent of the Turkish state’s debt was linked to foreign currencies in August. This means that the more the lira depreciates, the more painful it becomes to settle this debt.
Accordingly, former central bank deputy chief Semih Tumen, who was sacked by Erdogan last month, called for an immediate return to policies that protect the value of the lira. “This irrational experiment, which has no prospect of success, must be abandoned immediately and we must return to a quality policy that protects the value of the Turkish lira and the prosperity of the Turkish people,” Tumen said on Twitter.
Erdogan’s speech, on the other hand, portrayed a dark global conspiracy aimed at subjugating Turkey and said the country would not give in to calls from economists, “opportunists” and “global financial acrobats” for interest rate hikes.
He compared the struggle the nation waged against the foreign occupiers after the First World War, which culminated in the establishment of the modern Turkish Republic in 1923. “With God’s help and the support of our people, we will emerge victorious in this war for economic independence,” he said.
He is supported by Devlet Bahceli, head of the nationalist party MHP, which is part of Erdogan’s government. “Independent institutions (meaning the central bank) cannot stand above the will of the people,” said Bahceli. “Turkey should be free from the interest burden.” He also demanded that Turkey oppose the International Monetary Fund and the “interest lobby”.
A few weeks ago, Ulrich Leuchtmann, foreign exchange expert at Commerzbank, predicted a further decline in the lira. “It can be assumed that it will get a lot worse before it gets better,” he said.
Leuchtmann assumes that at a certain point the economic damage caused by the weakness of the lira will be so great that there will be a U-turn in monetary policy. But the timing is uncertain.
In his opinion, institutions can hide losses for a long time. His example: The big collapse on the US real estate market took place in the spring of 2007. Lehman did not go bankrupt until autumn 2008.
More: Crisis! What crisis? – How inflation in Turkey is widening the gap between rich and poor