With diplomatic tensions high, the Turkish lira has hit yet another
all-time low against the US dollar, which not only impacts the
Mediterranean country. But will its spillover into the eurozone bring a
bang?
Turkey's embattled lira on Friday hit new record lows against the US dollar, losing some five percent in value as fears grew over the exposure of European banks and tensions with the United States showed no sign of easing as Washington piled more pressure on Ankara through sanctions after a meeting between a Turkish delegation and US officials in Washington yielded no apparent solution to a diplomatic rift over the detention in Turkey of an evangelical American pastor.
The lira went into free-fall, sinking more than 12 percent at one point to reach and all-time low, having now lost more than one third of its value this year against the US dollar and the euro.
More broadly, concerns over the sickly Turkish economy's wider impact were intensified Friday by a report in the Financial Times that the supervisory wing of the European Central Bank had began to look more closely at eurozone lenders' exposure to the country.
Deepening investor concerns about Turkey's authoritarian trajectory under President Recep Tayyip Erdogan and the economic fallout have also weighed on the currency. Markets are deeply concerned over the direction of economic policy in Turkey where inflation has hit nearly 16 percent while the central bank remains reluctant to raise rates in response.
Speaking to supporters in the Black Sea province of Rize late on Thursday, Erdogan dismissed concerns over the currency as a campaign against his country. "There are various campaigns being carried out. Don't heed them," Erdogan said.
"Don't forget, if they have their dollars, we have our people, our God. We are working hard. Look at what we were 16 years ago and look at us now," he said. On Friday, Turkish Finance Minister Berat Albayrak — at the same time Erdogan's son-in-law — is set to unveil the government's latest plan for country's economy.
Turkish economist Korkut Boratav sees the need for urgent action: "The economy is fragile. Due to the foreign debts of companies and banks and the current account deficit, there is a great need for foreign capital."
A new analysis by Berenberg Bank sees little long-term impact of high Turkish inflation and low interest rates on eurozone gross domestic product (GDP) growth. "Even if eurozone goods exports to Turkey were to fall by, say, 20 percent, this would subtract no more than 0.1 percentage point from growth in the big eurozone," according to the report.
Even Turkey's annual GDP which is around €750 billion ($860 billion) is only equivalent to 6.5 percent of the eurozone's GDP. Though this is four times larger than Greece, it is still "less than half the size of the Italian economy, despite Turkey's larger population of around 80 million versus around 60 million for Italy," according to the analysis.
And even if eurozone exports to Turkey fell through the floor, previous experience has shown that European companies are "pretty quick in identifying and switching to new markets. Selling more elsewhere would offset some of the hypothetical decline in eurozone exports to Turkey." Once any crisis was over, the bank expects exports to recover quickly.
Obviously a real Turkish crisis would have knock-on effects, though Berenberg sees Europe's exposure to Turkish banks as being too small to cause much harm. Even in the worst case scenario, "bank supervisors in the eurozone would have sufficient tools at their disposal to contain the damage," making a credit crunch in any part of the eurozone highly unlikely, concludes the upbeat analysis.
Korkut Boratav is more concerned and thinks an intervention by the IMF is the only way to save the European banks. "The Europeans should have known that they should not lend to distressed banks," criticizes Boratav. "This is one of the most important principles of the free market economy — if you lend money, you take a risk and must accept the losses."
Read more: Will Turkey′s economic woes reach Europe? | Business| Economy and finance news from a German perspective | DW | 10.08.2018
Turkey's embattled lira on Friday hit new record lows against the US dollar, losing some five percent in value as fears grew over the exposure of European banks and tensions with the United States showed no sign of easing as Washington piled more pressure on Ankara through sanctions after a meeting between a Turkish delegation and US officials in Washington yielded no apparent solution to a diplomatic rift over the detention in Turkey of an evangelical American pastor.
The lira went into free-fall, sinking more than 12 percent at one point to reach and all-time low, having now lost more than one third of its value this year against the US dollar and the euro.
More broadly, concerns over the sickly Turkish economy's wider impact were intensified Friday by a report in the Financial Times that the supervisory wing of the European Central Bank had began to look more closely at eurozone lenders' exposure to the country.
Deepening investor concerns about Turkey's authoritarian trajectory under President Recep Tayyip Erdogan and the economic fallout have also weighed on the currency. Markets are deeply concerned over the direction of economic policy in Turkey where inflation has hit nearly 16 percent while the central bank remains reluctant to raise rates in response.
Speaking to supporters in the Black Sea province of Rize late on Thursday, Erdogan dismissed concerns over the currency as a campaign against his country. "There are various campaigns being carried out. Don't heed them," Erdogan said.
"Don't forget, if they have their dollars, we have our people, our God. We are working hard. Look at what we were 16 years ago and look at us now," he said. On Friday, Turkish Finance Minister Berat Albayrak — at the same time Erdogan's son-in-law — is set to unveil the government's latest plan for country's economy.
Turkish economist Korkut Boratav sees the need for urgent action: "The economy is fragile. Due to the foreign debts of companies and banks and the current account deficit, there is a great need for foreign capital."
A new analysis by Berenberg Bank sees little long-term impact of high Turkish inflation and low interest rates on eurozone gross domestic product (GDP) growth. "Even if eurozone goods exports to Turkey were to fall by, say, 20 percent, this would subtract no more than 0.1 percentage point from growth in the big eurozone," according to the report.
Even Turkey's annual GDP which is around €750 billion ($860 billion) is only equivalent to 6.5 percent of the eurozone's GDP. Though this is four times larger than Greece, it is still "less than half the size of the Italian economy, despite Turkey's larger population of around 80 million versus around 60 million for Italy," according to the analysis.
And even if eurozone exports to Turkey fell through the floor, previous experience has shown that European companies are "pretty quick in identifying and switching to new markets. Selling more elsewhere would offset some of the hypothetical decline in eurozone exports to Turkey." Once any crisis was over, the bank expects exports to recover quickly.
Obviously a real Turkish crisis would have knock-on effects, though Berenberg sees Europe's exposure to Turkish banks as being too small to cause much harm. Even in the worst case scenario, "bank supervisors in the eurozone would have sufficient tools at their disposal to contain the damage," making a credit crunch in any part of the eurozone highly unlikely, concludes the upbeat analysis.
Korkut Boratav is more concerned and thinks an intervention by the IMF is the only way to save the European banks. "The Europeans should have known that they should not lend to distressed banks," criticizes Boratav. "This is one of the most important principles of the free market economy — if you lend money, you take a risk and must accept the losses."
Read more: Will Turkey′s economic woes reach Europe? | Business| Economy and finance news from a German perspective | DW | 10.08.2018
