The Guardian: Erdoğan's high-risk path is surely leading Turkey to the IMF14 August 2018 | 04:24 | FOCUS News Agency
None of those actions arrived on Monday. The central bank lowered reserve requirements for banks, which may improve liquidity in the financial system for a short period but it kept the official interest rate at 17.5%. International investors knew how to read that decision. With inflation heading rapidly towards 20%-plus, it was a signal that Turkey is still refusing standard monetary medicine.
Then the president, Recep Tayyip Erdoğan, repeated his angry analysis of who was to blame. The US has stabbed a fellow Nato member “in the back”, he said and economic “traitors” are at work. Meanwhile, any notion of summoning the IMF, and thereby awakening memories of past Turkish crises, remains politically unpalatable. The net result was a further 8% slide in a currency that has lost roughly half its value against the dollar this year.
The medium-term consequences of Erdogan’s tough stance are not hard to guess. Local companies, overborrowed in US dollars, will struggle to repay their debts. Defaults will soar, pushing losses on to the banking system. Foreign capital, which has funded expansion to the point of economic overheating, will flee. Turkey, with a large current account deficit and an inadequate supply of foreign reserves, is poorly equipped to resist recession.
Erdoğan, with his comments about seeking “new alliances”, has hinted that he may actually think there is an easy route out. The trouble is, Turkey’s crisis is happening now, whereas any loans from Russia or China – who, in any case, have reasons not to inflame their own quarrels with the US – would arrive only slowly. One still has to assume that, one way or another, the IMF will eventually become involved, just as it did in Argentina in June. Quite how Erdoğan can credibly shift to such a position is anybody’s guess but it is the logical endgame.
The only vaguely good news is that the contagion warnings are not flashing red. A few European banks are overexposed, but the lending problem is not system-wide. In a bigger crisis, investors would also be selling the currencies of other weak emerging economies. The South African rand is sliding but one cannot – yet – call it across-the-board panic. That may come, however. Erdoğan has chosen a high-risk path and markets have a habit of asking who else cannot live with higher US interest rates.
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