The Turkish crisis is evident in surging bond-yields, while Ankara looks for international support,
On Monday the Turkish Treasury turned to domestic markets to borrow 3.2bn Turkish liras ($470 million) with a 55.8% accepted/tendered rate. Given a double-digit rate of inflation, this was cause for celebration. For international investors, such yields would not be attractive.
With shrinking foreign currency reserves, Ankara is seeking international support from allies everywhere, including Europe, Russia, and the Middle East.
The Turkish lira has been under pressure for months but nosedived as Washington moved to introduce sanctions over the detainment of a US pastor, Andrew Branson, who Ankara insists maintains ties with the self-exiled cleric Fethullah Gulen.
The fear of contagion of the Turkish economy to Europe has thus far focused on the banking system. On Friday, August 10, the Euro sank to 13-month lows as an article published by the Financial Times alleged that the European Central Bank was concerned about the exposure of European Banks to the Turkish economy, particularly BBVA, UniCredit, and BNP Paribas.
By Monday morning, the fear of contagion was spreading to Asia, from Hong-Kong and Singapore to South Korea and Japan. According to the Bank of International Settlements, Turkish banks have issued $148 billion dollar-denominated and €100 billion euro-denominated loans.
If the crisis persists, it will inevitably affect trade. Turkey’s most significant trading partner is Germany. As noted by the spokeswoman of the German Ministry of Finance, Beate Baron, on Monday, the trade volume between the two countries is €37.7bn, Anadolu Agency reports.
However, systemic contagion has not thus far triggered an appetite to extend support.
Indeed, Chancellor Angela Merkel noted on Monday that it is in Germany’s interest for Turkey to be “economically prosperous,” urging Ankara to reaffirm the independence of its central bank. The German foreign minister Heiko Maas offered Germany’s mediation to improve relations with Washington.
Market intervention to support the Turkish Lira has not been offered and international pressure is mounting on Turkey to seek a political accommodation.
Although the Turkish crisis is largely linked to foreign denominated debt, analysts have said that the willingness of the Turkish government to intervene in monetary policy is undermining the credibility of the central bank to reign over inflation and devaluation. President Recep Tayyip Erdogan has often made public his preference for lower interest rates, so as to maintain higher growth.
President Erdogan is now under pressure to distance himself from monetary policy as well as liberate Andrew Branson, at significant political cost.
Calling for Islamic solidarity, President Erdogan said on Monday that Washington has the dollar and “we have our God.” Analysts have interpreted this as a call for support from Turkey’s allies in the Middle East, including Qatar. Since 2017 Ankara supports Doha to withstand an ongoing Saudi-led embargo and could expect reciprocity. However, it is unclear whether Qatar alone can tilt the balance for Turkey.