Turkey, though, is in a class of its own. An economic and financial crisis that has been brewing all year has finally come to a head. Inflation has hit 15% and will inevitably be pushed higher because the lira is in free fall, dropping 14% on Friday alone. As Capital Economics have noted, when the rouble fell by a similar amount in 2014, the Russian central bank responded by raising interest rates by 6.5 percentage points and announced measures to support the banking system.
Russia had learnt lessons from its previous crisis, not least the need for ample foreign currency reserves to help defend the exchange rate. Turkey does not have deep pockets and has a president, Recep Tayyip Erdoğan, who has decided that the conventional response to a plunging currency – higher interest rates – is not for him.
Erdoğan is one of the world’s current crop of self-styled strongmen leaders but has the misfortune to come up against someone who is a lot stronger than he is. Relations between Turkey and the US are not good. The White House is unhappy that Erdoğan has put in an order with Vladimir Putin to buy Russian rather than American missiles. When Donald Trump announced economic sanctions against Iran last week, Erdoğan pointedly refused to take part. And, so far, Turkey has refused to release an American pastor, Andrew Brunson, held on disputed terrorism charges.
Trump chose his moment well. On Friday, when Turkey was in chaos, he announced that he was doubling tariffs on imported steel and aluminium, vital to the Turkish economy. Talk about kicking someone when they are down.
Erdoğan has insisted that he will not be browbeaten into submission but has few realistic options. To be sure, Turkey can seek to put pressure on Trump by saying that it will quit Nato and forge closer ties with Russia. Erdoğan could warn the EU that it will face a new inflow of migrants unless it intervenes on his behalf.
But what the financial markets are looking for are not diplomatic moves that demonstrate Turkey’s geopolitical importance but rather economic measures to prevent a potentially ruinous tsunami of selling over the coming days. In that respect, failure to tackle the signs of trouble earlier will now prove costly.
Erdoğan’s answer to the financial crisis – that his followers should do their patriotic duty and exchange rapidly appreciating US dollars for ever-more worthless Turkish lira – is laughable. Indeed, it will merely add to the belief in the world’s financial markets that Turkey is being led by a man who has lost touch with reality.
It is clear what needs to happen. Turkey has to tackle the three causes of its current predicament: an overheating economy; Erdoğan’s attempts since his re-election in June to prevent the central bank from taking the necessary action to deal with rising prices; and the stand-off with the US.
https://www.theguardian.com/world/2018/aug/12/turkey-crisis-widen-and-options-running-out-erdogan
