By Susanne Fowler
Many seeing the latest Turkish Airlines ads would view the lira crisis as an opportunity for an inexpensive escape to the sun-drenched Mediterranean.
But as the currency continues its freefall and key financial indicators add to the sombre picture, investors and analysts are watching for signs that the crisis could infect other global economies.
The lira has fallen more than 40 per cent against the US dollar this year, while Ankara’s relationship with Washington has soured.
In Europe, one fear is that Turkish businesses that borrowed foreign currency from major banks like BBVA of Spain, UniCredit of Italy or BNP Paribas of France could have trouble making the suddenly pricier repayments in euros or dollars, and might default on those loans.
Australia is not immune from concerns about an impending financial crisis in Turkey, with the Australian dollar falling to an 18-month low against the US dollar on Monday.
Turkey is hardly Australia’s biggest trading partner, ranking 33rd with nearly $1.3 billion in two-way trade in 2015. But several Australian energy, construction, minerals and agribusiness companies have invested there and may be getting nervous.
Shares in Australian mining giants Rio Tinto and BHP Billiton fell in trading on Monday, with financial media blaming fragile state of global markets on heightened tensions between Turkey and the US.
Erdogan ‘rules like an Ottoman sultan’
So how did Turkey, a strategically positioned member of NATO, a member of the Group of 20, a country of about 80 million people with a young population, get into this mess?
Opponents of President Recep Tayyip Erdogan blame an insistence on ruling like an Ottoman sultan, ever consolidating power into the hands of his cronies and even his own family.
Armed with additional clout in the latest election, he recently put in 40-year-old son-in-law, Berat Albayrak, in charge of the Ministry of Finance and Treasury, a move that gutted confidence in the independence of the Turkish Central Bank and its ability to resolve such crises.
Detractors of Mr Erdogan say he campaigned on a construction boom that created bridges, an airport and shiny waterfront hotels but which were paid for by dangerous financial policies that are now beginning to crumble.
Mr Erdogan, on the other hand, has a laundry list of entities he views as the perpetrators of his country’s money malaise.
Erdogan says Trump starting an ‘economic war’
In a speech to his AK Party faithful in Trabzon on Sunday, Mr Erdogan accused President Donald Trump of starting an “economic war” by doubling tariffs on imports of Turkish aluminium and steel.
Mr Erdogan said the US “operation” was designed to “force Turkey to surrender in every field from finance to politics.”
Relations between Ankara and Washington were already fraught after years of disagreements over the war in Syria, the status of the Muslim cleric Fethullah Gulen who remains in exile in Pennsylvania and whom Mr Erdogan blames for an attempted coup in 2016, and more recently over the jailing on terrorism charges of American pastor Andrew Brunson.
Claims ‘fake news’ is to blame
As it consolidated control in recent years over what was left of an independent news media, the Turkish government took on social media with a vengeance, shutting down access even to Wikipedia.
This week, as economic-contagion fears built, Mr Erdogan’s government took a page out of the Trump playbook by blaming “fake news” for the fall of the lira.
According to the Hurriyet Daily News, the Interior Ministry announced that “a judicial investigation has been launched into 346 social media accounts who shared posts to provoke the rise in the dollar exchange rate”.
The newspaper also quoted a government undersecretary as saying that Turkey’s Financial Crime Investigation Board “started an investigation into people and institutions that spread fake news” intended to undermine the lira-dollar exchange rate. Mr Erdogan has also cleverly used the US media to state his case.
In an op-ed article in The New York Times on Friday, Mr Erdogan threatened to “to start looking for new friends and allies” if Washington continued to demonstrate “disrespect.”
No appetite for raising interest rates
Conventional economic wisdom says that one way to calm worried financial markets and slow inflation would be to raise interest rates.
But Mr Erdogan has long disagreed, saying in 2015 that high lending rates hurt economic growth and that anyone who supported what he termed “the interest-rate lobby” was guilty of treason.
This week, bankers told Reuters that the Turkish Central Bank would meet “banks’ lira liquidity needs at an overnight rate of 19.25 per cent if needed”, in what the bankers said could be a first step toward tightening monetary policy.
The Central Bank also lowered the amount of cash commercial lenders must keep in reserve with regulators.
Turkey’s strongman seems stuck
And Mr Erdogan’s spokesman Ibrahim Kalin wrote on Twitter that Turkey would emerge stronger from the process as the government works to support financial stability.
Just last week, Mr Erdogan was urging ordinary Turks to do their part to support the currency, saying, “If there is anyone who has dollars or gold under their pillows, they should go exchange it for liras at our banks.”
Either way, Turkey’s strongman seems stuck. He can’t risk losing face among his supporters but he also can’t risk leading them into ruin. Winter is coming and Turkey relies heavily on costly energy imports.
Meanwhile, there are those taking advantage of low lira pricing. On Sunday, shoppers at Istanbul’s Istinye Park mall were seen lining up outside luxury stores like Louis Vuitton and Chanel to snag bargains before retailers could adjust the price tags higher.
Susanne Fowler is a former London-based assistant business news editor of The New York Times International. She covered Turkey for several publications during Recep Tayyip Erdogan’s rise to power.
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