Turkey is a signal of wider calamity in global markets - analyst

The danger of a severe economic crisis in Turkey is only a harbinger of a wider calamity in global markets, according to analyst Tim Lee, who has been warning against the fragility of the Turkish economy since 2011, the New York Times reported on Saturday.

Turkish lira fell to successive record lows against the dollar over the past weeks, due to a diplomatic battle with the United States over the release of Pastor Andrew Brunson and other U.S. nationals jailed in Turkey, coupled with the worries of the investors regarding President Recep Tayyip Erdoğan’s grip on monetary policies. 

The economic meltdown in Turkey may have spillover effects on the global financial markets, as the stock prices of European banks, which have been big lenders to their Turkish counterparts, dropped sharply on Friday, with investors worried that a wave of corporate bankruptcies in Turkey would lead to a banking bust in the country, the New York Times said.

“Turkey is the canary in the coal mine,” Tim Lee said on Friday. “We are going have another crash that will be worse than 2008 in certain ways.”

After working as an economist for the British mutual fund company GT Management, Lee started his own business in 2003 and writes the newsletter called piEconomics followed by a small cluster of European Investment Banks.

As early as 2001, at a time when the Turkish economy was regarded as one of the successful examples of emerging markets, Lee predicted that Turkey would need a $100 billion bailout, noticing that the Turkish growth was reliant on financing from foreign investors, showing similarities to what had happened to Thailand in the years before the Asian financial crisis in 1997.

In 2013, he claimed that the Turkish lira, then trading at 1.9 to the dollar, would crater to 7.2, yet many overlooked his prediction, as Turkish economy was humming. However, Turkish economy gradually deteriorated over the next five years as he had anticipated.

Corporate, financial and other debt denominated in foreign currencies, mostly dollars, represents about 70 percent of Turkey’s economy and a weakening of Turkish lira makes it harder for companies to repay their loans in foreign currency. 

The threat is that as the lira loses value, it becomes more expensive for Turkish companies to repay their dollar-denominated loans. “Companies there just ignored all the risks and kept borrowing in dollars,” Lee told the New York Times.

Nowadays, Lee argues that Turkey can be a signal for other economies that are reliant on cheap debt. He predicts that a global financial crisis will follow, with investors fleeing developing economies, then Europe and eventually the American stock and bond markets.

“It won’t be a banking crisis this time around — it will be a financial market crisis,” Mr. Lee said. “And I am very confident that it will happen.”