11REMARKS Bloomberg Businessweek August 20, 2018
○ Turkey was ripe for a currency
crisis—and all it took was a tweet.
The question now: Will it spread?
○ By Peter Coy
The hurt that President Trump laid on Turkey on Aug.10 was
feather-light—a doubling of tarifs on imported Turkish steel
and aluminum. Turkey sells only about $1.4 billion in pri-
mary metals to the U.S. in an average year, according to the
U.S. Commerce Department. So the new levies will reduce
the country’s gross domestic product by just about 0.04 per-
cent. And that’s assuming Turkish mills and smelters have to
cut prices by 25 percent to retain their American customers—
the hit will be even less if the Turks ind customers in other
nations that aren’t jamming it with high tarifs.
So why did a 0.04 percent slap on the wrist—more of a tap,
really—cause the Turkish lira to plummet; prompt President
Recep Tayyip Erdogan to complain of “economic warfare”;
push down the currencies of Argentina, India, Indonesia,
Mexico, Russia, South Africa, and Zambia; and raise Italy’s
borrowing costs to their highest vs. Germany’s since May? It’s
simple, actually. Conditions for a crisis were ripe. Financial
weakness and poor policies in Turkey and other vulnera-
ble nations supplied dry tinder. Two headstrong characters,
Erdogan and Trump, butting heads like lint and steel, pro-
vided the spark. “Countries go through stress in two ways,
gradually and then suddenly. We’re seeing the ‘suddenly’
right now,” says Samy Muaddi, a Baltimore-based money
manager at T. Rowe Price Group who manages the Emerging
Markets Corporate Bond Fund.
The currency crisis is a huge blow to Erdogan, who won
reelection in June. Investors grew restive after the vote when
he appointed his son-in-law, Berat Albayrak, as treasury and
inance minister and exerted pressure on the central bank
not to raise interest rates, which would have helped defend
the currency and lower inlation. Now things are coming to a
head. Turkish banks and noninancial businesses borrowed
heavily in dollars, so the fall of the lira will sharply increase
their inancing costs, raising the risk that this becomes a full-
blown debt crisis. “The authorities need to act decisively,
but history suggests that they will instead procrastinate,”
writes Nafez Zouk, the lead emerging-markets economist
at Oxford Economics in London.
Erdogan has been wanton in his management of the econ-
omy. He suggests that high interest rates are “the mother and
father of all evil” and subscribes to a theory that increasing
them causes inlation. In striving to show inancial indepen-
dence, the autocrat has done the opposite: raised the like-
lihood Turkey will eventually require assistance from the
International Monetary Fund, China, or someone else. On
Aug. 14 he was reduced to threatening a boycott of iPhones.
The next day, Qatar threw him a lifeline, promising to invest
$15 billion in Turkey. The strongman appears weak.
For the rest of the world, the risk is contagion, the
transmission of financial problems from one nation to
another. Even if Turkey doesn’t directly infect other coun-
tries, its troubles could instigate a general retreat from vul-
nerable emerging markets. Contagion “is a very elusive
term,” says Lale Akoner, a market strategist for BNY Mellon
Investment Management in New York.
To be sure, contagion is not what most economists are pre-
dicting, given that Turkey accounts for only 1 percent of the
global economy and the market value of all Turkish compa-
nies traded on the Istanbul Stock Exchange is less than that
of McDonald’s Corp. The Turkey-centered crisis is likely to
be milder than the emerging-markets crisis of 1997-98, which
began when Thailand abandoned its peg of the baht to the
dollar. That episode slammed Indonesia and South Korea as
well as Thailand. It also touched Hong Kong, Malaysia, and
the Philippines. Since then, Asian economies have ixed their
inances and built reserves of foreign currencies as cushions
against a panic. The fallout this time might even turn out to
be less than after the “taper tantrum” of 2013, when countries
such as India, Indonesia, Mexico, and Poland were infected
by fear that the Federal Reserve was about to taper its pur-
chases of long-term bonds, driving up U.S. interest rates and
sucking money away from emerging markets.
But the crisis is still ugly for nations that are under
pressure—particularly Turkey itself, whose inlation rate,
16 percent in July, will go even higher when the drop in the
value of the lira raises import prices. (The lira is down almost
40 percent this year.) And the crisis is afecting leaders of
countries who, unlike Erdogan, are trying to hew to eco-
nomic orthodoxy. In South Africa, the rand’s decline puts
pressure on President Cyril Ramaphosa, who took oice in
February on a promise to end corruption and stagnation.
Likewise, in Argentina, a declining currency and rising bond
yields complicate the job of President Mauricio Macri, whose
market-friendly economic policies are a contrast to those of
his predecessor, Cristina Fernández de Kirchner.
Two lessons emerge from this episode. The irst is that
if you’re in a small country with an economy that’s open to
foreign trade and investment, you should borrow cautiously.
And resist the temptation to borrow in foreign currencies
to qualify for a slightly lower interest rate. The Institute for
International Finance estimates that dollar-denominated cor-
porate liabilities total $3.7 trillion in emerging markets, dou-
ble the amount of 2010.
The point is, you don’t want to put yourself in a position
where you depend on the kindness of strangers, especially if
those strangers are people who manage billions of dollars in
investments on the trading desks of New York and London.
They will lavish money on you when times are good, taking
advantage of the higher returns typically available in emerg-
ing and developing markets. But when the good times go bad,
they will turn against you in a heartbeat, driving down the