Turkey's lira crisis: How bad can it get?

Leroy Wright
August 12, 2018

Relations with Washington worsened further Friday when Trump tweeted that he had authorized a 20 percent duty on aluminium and 50 percent duty on steel.

And so he announced he is going to double the steel and aluminum tariffs on them to make up for the fact "their currency" has slid so "rapidly downward against our very strong Dollar!"

"At a time when evil continues to lurk around the world, unilateral actions against Turkey by the United States, our ally of decades, will only serve to undermine American interests and security", Erdogan said in the article.

The two governments have been at odds over a wide range of topics - from diverging interests in Syria, to Turkey's ambition to buy Russian defence systems, and the case of evangelical pastor Andrew Brunson, who is on trial in Turkey on terrorism charges. Trump also threatened additional "large sanctions" against Turkey, a North Atlantic Treaty Organisation ally, for Brunson's detention.

Turkish President Recep Tayyip Erdoğan said Friday that his country was the target of a global financial war and urged citizens to exchange their dollars, euros and gold for lira to bolster the economy.

The lira tumbled about 10 per cent on Friday to another record low as investors worry about Erdogan's unorthodox economic policies and USA sanctions.

Erdogan said Turkey acted in accordance with the law, saying: "We have not made concessions on justice so far, and we will never make any".

Erdogan on Saturday repeated a call to Turks to help support the lira to win what he described was a "war of independence".

Without naming countries, Erdogan said supporters of a failed military coup two years ago, which Ankara says was organized by a USA -based Muslim cleric, were attacking Turkey in new ways since his re-election two months ago.

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Turkish newspaper Hurriyet and other media reports quote Erdogan as making the comment to a group of worshippers following traditional Muslim Friday prayers during a visit to the northern city of Bayburt.

Turkey was hit by a financial shockwave this week as its currency nosedived over concerns about the government's economic policies and a trade dispute with the United States.

The lira tumbled 14 percent Friday, to 6.51 per dollar, a massive move for a currency that will make Turkish residents poorer and further erode worldwide investors' confidence in the country.

Although Erdogan struck a defiant tone, his foreign ministry called for diplomacy and dialogue to solve problems with Washington and Trade Minister Ruhsar Pekcan said "we implore President Trump to return to the negotiating table".

Erdogan said high foreign exchange rates were being used as a weapon against Turkey.

Erdogan has been putting pressure on the central bank to not raise interest rates in order to keep fueling economic growth. And it is not too far away from the level at which Goldman Sachs warned Turkey's banks would run out of the extra capital they had built up as a buffer against a crisis.

Immediately give these to the banks and convert to Turkish lira and by doing this, we fight this war of independence and the future.

President Trump and Turkish President Recep Tayyip Erdogan appear in the Roosevelt Room of the White House on May 16, 2017. Turkey retaliated with Erdogan ordering authorities to freeze the assets of the US justice and interior ministers in Turkey - "if there are any". For China, stabilizing a fellow emerging economy's currency has value, but Beijing could also benefit from becoming an economic friend to a North Atlantic Treaty Organisation state whose relationship with the West is increasingly strained.

"If some of these vulnerabilities crystalise they could tip the economy into a full blown crisis", said its economist Yasemin Engin.

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