(Reuters) – This year, the Turkish lira has lost almost a quarter of its value because of rising prices and the central bank’s reluctance to raise interest rates. This has led to fears of another currency crisis.
Turkey has been considered one of the riskier emerging markets for a long time because it has had a lot of booms and busts and its currency has changed a lot. It also has big current-account deficits and relies on money from outside the country to fund its unorthodox growth policies.
(Graphic: Turkish lira timeline- https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwedaqvo/Turkish percent 20 lira percent 20timeline percent 20June percent 202022.PNG)
Here are some times when the lira was in the news:
2000/2001 – BANKING & CURRENCY CRISIS
Concerns about the health of a weak banking sector grew toward the end of 2000. This causes banks to cut off interbank lines to weak lenders and investors to sell stocks and government bonds.
As more money leaves the country because of the failure of Demir Bank, the central bank cuts off emergency lines of credit to lenders to protect its own assets.
Turkey gets $10.5 billion from the International Monetary Fund, which lets the central bank keep the lira pegged to the dollar. However, this doesn’t happen until after the currency has dropped by 25 percent in less than three weeks.
A political crisis makes it harder for people to trust the system, which leads to an attack on the lira. On February 22, the government lets the lira float, and it loses about one-third of its value against the dollar.
2013/2014: TAPER TANTRUM, CORRUPTION SCANDAL
Turkey is one of the emerging markets that will be hurt by Federal Reserve Chair Ben Bernanke’s May 2013 announcement that the U.S. central bank will stop buying assets as quickly.
Domestic problems like a corruption scandal that led to the resignation of key ministers and a reshuffle of the cabinet add to the stress.
Policymakers don’t want to do anything to stop the fall of the lira because President Tayyip Erdogan wants to keep interest rates low before local elections. In January 2014, the falling value of the currency forced the central bank to act: it held an emergency overnight meeting to raise interest rates from 7.75 percent to 12 percent.
2018 – WASHINGTON SANCTIONS, ERDOGAN DOUBLES DOWN
A failed coup in July 2016 and a constitutional referendum in 2017 caused big changes in Turkey’s government. The country is moving from a parliamentary system to a presidential system.
In May 2018, Erdogan promised to have a tighter grip on monetary policy and lower interest rates, which adds to worries about the state of the economy.
After Turkey arrested and jailed American pastor Andrew Brunson on terrorism charges, Washington put economic sanctions in place. This caused the currency to drop by 25% in August alone.
The meltdown causes an economic crisis, which leads to a lot of downgrades of sovereign ratings and sends ripples through emerging markets.
2021/2022 – ROARING INFLATION
Between September and December 2021, the central bank cuts interest rates by 500 basis points, even though inflation will rise to 36% by the end of the year due to problems in the supply chain and rising demand after COVID-19.
In November, the value of the lira fell by almost 30 percent. This makes policymakers take steps to convince savers, banks, and companies to hold lira instead of foreign currency while the central bank tries to keep the lira stable.
After a few weeks of relative calm at the start of 2022, the lira crisis comes back when Russia invades Ukraine on February 24 and causes prices to rise around the world. Turkey’s inflation is going above 70%, and it’s likely to get worse. Geopolitics adds to the pressure because Ankara doesn’t want Sweden and Finland to join NATO, and a border offensive into Syria is coming up soon.
Analysts worry that the country could be facing another currency crisis because its net foreign currency reserves are very negative, interest rates are at 14 percent, and Erdogan has promised to keep rates low.
