Aug 10 2018

Turkish lira dives 20% in crisis as Trump levels sanctions

Turkey’s lira slumped 20 percent against the dollar, raising the prospect of a full-blown financial crisis in the NATO member country, after U.S. President Donald Trump ordered more economic sanctions against Turkey, and his Turkish counterpart declared economic war.

The lira fell to as low as 6.76 per dollar in Istanbul and declined 17.5 percent to 6.52 at 5 p.m. Turkey's credit default swaps, a product investors buy to insure against sovereign debt default, surged 19 percent to 444.49, extending the highest level since the 2008 financial crisis.

Trump said he was doubling tariffs on Turkish steel to 50 percent and on aluminum to 20 percent, following up on sanctions against two Turkish ministers last week over Turkey's internment of Americans, including pastor Andrew Brunson.

"Our relations with Turkey are not good at this time!" Trump tweeted.

Meanwhile, Turkish President Recep Tayyip Erdoğan said Turkey was involved in an economic war and would be victorious, blaming what he called an "interest rate lobby" and "economic henchmen" for the lira's slide.

Investors are calling on Turkish policymakers to raise interest rates in an emergency meeting to stem the currency’s freefall. The currency has now lost more than 40 percent against the dollar this year.

But Turkey’s central bank has its hands tied. Erdoğan, who believes that higher interest rates are inflationary and part of a foreign plot to make Turkey subserviant to investors and the dollar-based financial system, has been calling for lower rates to help boost economic growth. He increased his control over the central bank last month, making himself personally responsible for appointing the governor and his deputies, and reducing their terms in office to four years from five.

The lira is also highly vulnerable after inflation surged to almost 16 percent in July and the current account deficit widened to 6.5 percent of GDP amid government stimulus, prompting warnings from ratings agencies and the International Monetary Fund that the economy was heading for a hard landing.

Some analysts have called on Turkey to seek support from the IMF to shore up confidence.

Washington imposed sanctions against two Turkish ministers last week for their part in the detention of Brunson on terrorism charges and has signaled yet more measures unless he and other Americans and two local U.S. consular workers are freed. Talks between Turkish and U.S. officials broke down in Washington on Wednesday.

Brunson is seen as a hero by evangelical Christians in the United States as Trump faces mid-term elections.

Washington is reviewing Turkey's participation in a duty-free trade deal for developing countries and could impose billions of dollars of penalties against a state-run Turkish bank for circumventing sanctions on Iran.

The U.S. Treasury is currently carrying out an investigation of the lender, Halkbank. A top executive of the company, Mehmet Hakan Atilla, is in a U.S. jail after he was found guilty of involvement in the scheme by a New York court in January. He is appealing the conviction.