As the Turkish Lira plunged to fresh lows against USD with USDTRY hitting 7 for the first time in history, the country’s leader used a national press conference to accuse the US of trying to “stab it in the back”. Following the imposition of sanctions on Turkey by the US last week over the country’s refusal to extradite a US pastor held in detention in the country, the economy hit a tailspin causing TRY to plunge. The CBRT attempted to bolster the currency by hiking rates but was unable to stop the decline leading to a dramatic flash crash last week here USDTRY surged 13% in just under a minute in response to Trump doubling tariffs on Turkish steel and aluminum.
What is the Situation with The Pastor?
The US has voiced its outrage at the country for refusing to release US pastor Andrew Brunson who was detained around two years ago on accusations of being linked with the outlawed Turkish worker’s party and the Gulen movement which is blamed for the failed military coup of 2016.
In turn, Turkey is angry at the US over its failure to “unequivocally condemn” the Gulen movement for its actions in 2016 and also for not extraditing the Turkish cleric Fethullah Gulen who lives in the US.
US Backing of Kurdish Rebels An Issue
Another key flashpoint between the two countries is the issue of US support for Kurdish rebel groups in combat with IS in northern Syria given Turkey’s struggle against its own Kurdish insurgency. Alongside this, Erdogan has also been making moves to strengthen his ties with Russia which is problematic given Turkey’s role as a NATO member and Russia’s place as the group’s main threat.
Addressing the nation from the capital, Ankara, Erdogan said of the US “You act on one side as a strategic partner, but on the other, you fire bullets into the foot of your strategic partner.
“We are together in NATO and then you seek to stab your strategic partner in the back.”
Erdogan Ignoring Economic Failings
Essentially, Erdogan is claiming that the sharp devaluation of the Lira is due to a plot by the US to undermine the country rather than as a result of failing economic conditions with both inflation and borrowing levels soaring. The domestic equity market is down 17% on the year while government borrowing costs have risen 18% and inflation has risen 15%. The country’s interior minister said that it will be taking legal action against 346 social media accounts accused of spreading news of TRY weakening in a “provocative way”.
CBRT To Ensure Liquidity
Speaking yesterday also, the central bank said that banks will be given all the necessary liquidity in order to continue operating at full capacity and keep money moving, yet it did not enact another rate rise. Many industry experts have criticised the failure of the bank to act more decisively and question whether it is due to pressure from Erdogan who is famously against interest rate increases and has labeled the TRY’s devaluation as “a storm in a teacup”.
Banks Worried Over Contagion
Globally, the fear is that Turkish companies will struggle to repay loans held in EUR and USD causing a run of defaults. With the majority of Turkish banking sector assets comprised of foreign loans, there is a high level of contagion, especially for Eurozone banks such as BNP Paribas, UniCredit and BBVA. For now, the market waits to see where the TRY heads next but the outlook is definitely not encouraging.