Could Turkey's currency crisis spread "contagion"?

Marcus Newton
August 15, 2018

A man shops in a market in Istanbul, Monday, Aug. 13, 2018.

The Turkish Central Bank announced on Monday that banks would be given all the liquidity - help to keep money moving - they needed.

The top US diplomat in Turkey has called for the cases against an American pastor and others held in Turkey to be resolved "without delay" and in a "fair and transparent manner".

The drop of the Turkish currency is the result of president Trump approving the doubling of tariffs on Turkish steel and aluminium.

Trump wrote on Twitter late last month that his country "will impose large sanctions on Turkey for their long time detainment of Pastor Andrew Brunson". And as long as tensions with the US remain high, the risk of further sanctions "will be there".

Sergey Lavrov, speaking after talks Tuesday with his Turkish counterpart, Mevlut Cavusoglu, said the wide use of sanctions reflect Washington's desire to win domination and secure unilateral advantages for its businesses.

Russia's Foreign Minister Sergei Lavrov, who is visiting Ankara, branded the United States sanctions an illegitimate policy at a news conference on Tuesday.

The dispute between the USA and Turkey has started an economic crisis in Turkey that has pushed its currency to historic lows.

The Turks have exhausted the possibility of interest rate hikes and are backed into a corner by their inadequate level of currency reserves, Paul McNamara, emerging markets investment director at GAM Investments in London, said in a note.

European shares steadied after a two-day selloff as concerns about contagion from Turkey's currency crisis eased.

Independent economists say it would be hard to unseat the dollar as the top reserve currency as it is used widely in the global economy, for example to trade in oil and for commercial deals.

Relations between the two North Atlantic Treaty Organisation allies have spiraled into a full-blown crisis over the trial of Christian pastor Andrew Brunson, who was held for 21 months in a Turkish prison until his transfer to house arrest last month - a move Washington dismissed as insufficient.

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The declaration comes as a trade war between the United States and Turkey has caused the Turkish currency, the lira, to plummet over the past few days, sending shockwaves throughout global markets.

Turkish currency tumbled low over deteriorating relations with the United States as President Donald Trump unexpectedly doubled metal tariffs against the Muslim state on Friday. Although he was released to home detention, he faces a prison sentence of up to 35 years if he is convicted at the end of his ongoing trial.

In essence, investors have lost faith in the current economic policies of the Turkish government, anxious that a continued weakening of the economy will cause Turkish borrowers to struggle to repay their foreign debts.

The Turkish currency lost nearly 10 percent on Monday and nerves were briefly tested again as Erdogan urged Turks to boycott US electronic products in response to recent criticism from Washington.

"If they have iPhones, there is Samsung on the other side, and we have our own Vestel here", he said, referring to the Turkish electronics company.

Not much yet. Turkey's finance minister said they would start implementing an action plan on Monday but gave no further details.

It's not clear from the speech quite what this boycott could entail - whether it's Erdogan encouraging people to buy non-American devices or whether this will be a full-on ban on imports. On Tuesday, one dollar was worth 7.2 lira.

The move comes after the USA imposed sanctions on two Turkish ministers over the continued detention of an American pastor on terror-related charges, and President Donald Trump compounded the country's economic crisis by doubling steel and aluminium tariffs to 50% and 20%, respectively.

The day after the summit, Israel let the Turkish woman walk free, but Turkey merely moved Brunson from jail to house arrest, where he remains today.

Turkish government officials are concerned, but the country's tourists have taken advantage of the plunging currency to snap up luxury goods at stores such as Chanel and Louis Vuitton.

Recep Tayyip Erdogan once again urged Turks to sell dollars and buy liras to help boost the currency.

Other reports by MaliBehiribAe

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