Aug 11 2018

Turkey re-enacting Asian financial crisis – Nobel-winning economist

Turkey is re-enacting the steps that led to the Asian financial crisis two decades ago, Nobel Prize-winning economist Paul Krugman wrote in the New York Times on Saturday.

“Here’s the script: start with a country that, for whatever reason, became a favorite of foreign lenders, and experienced a large inflow of foreign capital over a number of years. Crucially, the debt thus incurred is denominated in foreign currency, not domestic,” he said.

“Loss of confidence causes your currency to drop; this makes it harder to repay debts in foreign currency; this hurts the real economy and further reduces confidence, leading to a further decline in your currency; and so on. The result is that foreign debt explodes as a share of GDP.”

If Turkey does not effectively respond to the crisis through economic policy, then it will not recover until all the companies vulnerable to problems stemming from low exchange rates go bankrupt, Krugman said. Only then would the country begin afresh with an export boom fuelled by the weak currency.

The only way to escape this is by having sufficient international trust to be able to temporarily impose some forms of capital controls while convincing investors you are preparing a fiscally-responsible regime, he added: not a simple task.

“That, unfortunately, doesn’t sound like Erdogan’s Turkey. Of course, it doesn’t sound like Trump’s America, either. So it’s a good thing our debts are in dollars,” Krugman said.

https://www.nytimes.com/2018/08/11/opinion/partying-like-its-1998.html

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