Economic turmoil hits Turkey, US bank stocks react

Roman Schwartz
August 11, 2018

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Aluminium will now be 20 per cent and Steel 50 per cent. That is two times the level announced earlier this year in March. The plunge followed a deepening rift with the United States, worries about its own economy and lack of action from policymakers.

Consistently deteriorating relations between the US and Turkey over recent years have risen to alarming levels, dealing a severe blow to both Turkey's economy and its currency.

Already, U.S. -Turkey relations have been strained over an array of conflicts.

The lira has now lost over a third of its value against both the dollar and the euro this year, with the currency battered by both concerns over domestic economic policy and the political situation.

Turkey is front and center of the chaos on Friday, with its currency plunging to a record low against the United States dollar.

Aside from the impact a potential Turkish debt crisis may have on European markets and financial institutions, which could have a rippling effect on other global markets, the falling lira also matters because it helps to further depress an already-weakened euro and further strengthen the USA dollar, which has been rising sharply for much of this year. In Europe, where exposure to Turkey is far higher, Germany's DAX fell by 1.7% and France's CAC by 1.2%.

FILE PHOTO: A money changer counts Turkish lira bills at an currency exchange office in central Istanbul, Turkey, August 21, 2015.

Turkish President Tayyip Erdogan has remained defiant despite the lira being in free fall.

Turkey's benchmark one-week repo rate is now 17.75%. With central banks holding down interest rates, currency traders are the new economic enforcers, as Friday's volatile markets showed. Inflation increased 16 percent in July, and Erdogan has insisted that interest rates not increase.

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A lower growth target goes to the heart of Erdogan's dispute with the International Monetary Fund (IMF) and others warning that the Middle East's largest economy may have overheated.

Turkey also is seeking the release of a Turkish banker, Mehmet Hakan Atilla, who was convicted in USA federal court in May on sanctions-busting charges related to the purchase of Iranian oil.

A Turkish man waits to change his USA dollars with Turkish liras inside a currency exchange shop in Ankara, Aug. 10, 2018. "Our relations with Turkey are not good at this time!" he added.

The diplomatic dispute with the USA was one of the triggers that turned market jitters into a full-blown route this week.

Adding to investors' concerns, Erdogan pledged a continuation of his debt-fueled construction policy to boost the economy, which is blamed for Turkey's rampant inflation and has added to currency weakness.

Brunson was arrested in 2016 on charges that he had participated in a failed military coup against Erdogan, and had colluded with Kurdish militants. Brunson is on trial and faces up to 35 years in prison if he is found guilty.

The White House followed through on that threat on August 1 and sanctioned two top Turkish officials linked to Brunson's ordeal.

'If they have their dollar, we have the people, we have Allah, ' he said.

Paul Greer at Fidelity International said dramatic interventions were now needed as Turkey faced a "downward spiral" of investor confidence.

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