Turkey’s Crisis Could Cause Domino Effect

European banking and bad economy crisis as a cracked earth map piggy bank

In recent days you would have noticed a spike in news stories regarding Turkey.

Now, when thinking about the global economy, your mind usually goes straight to the powerhouses — mainly, the US and China.

This week however, Turkey is at the forefront of economic minds everywhere.

While the US dollar has strengthened this year, the Turkish lira has dropped dramatically. In fact, ABC News reports that it has dropped roughly 40% against the US dollar.

And it doesn’t look as if the currency will start to rise any time soon. If anything, the currency may drop even further.

So what caused the lira to drop so dramatically?

Well, with relations worsening between the US and Turkey, and with new 50% tariffs imposed on steel from the US, the lira took a hit.

The reason for the double in tariffs was because Turkey refuses to release Evangelical Christian pastor Andrew Brunson. Brunson is being held on terrorism charges.

According to Al Jazeera, ‘The lira recovered slightly on Tuesday, helped by the central bank’s new liquidity measures and news of a planned conference call in which the finance minister would seek to reassure investors.’

Financial analyst and CEO of Rich Management, Aly-Khan Satchu, told Al Jazeera that the economic crisis is because the ‘US dollar has been weaponised — either deliberately or by design’.

Satchu further added:

What we’re seeing is the reduction of dollars being supplied into the system and the end of quantitative easing…

When the global markets were flooded with cheap and free dollars, everybody got terribly excited, particularly across emerging and frontier markets, and now we have seen a whiplash turn here’.

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Turkey’s poor will be the ones to suffer

And with the liar becoming increasingly unstable, Turkey’s poor will most likely suffer the most.

Why? Because simple staples, such as bread, are going to become less affordable for those on the lower socio-economic scale.

As reported by The Financial Times, ‘The Turkish bakers’ federation on Thursday announced a 15 percent increase in bread prices. The cost of an iPhone is up by a quarter.’

So what’s the Turkish government’s plan to avoid a total economic collapse?

Well, according to Al Jazeera, the central bank on Monday ‘increased liquidity of its banking sector.’

Furthermore, ‘The industry ministry announced the activation of $1.2bn for the Turkish industrial production.’

But on Tuesday, the Turkish president stated that all US electronic goods would be hit with a boycott from Turkey.

But Turkey may not be the only country affected by this crisis. It would be naïve to assume that this will not spread further into Europe, North America, Asia and even here at home in Australia.

On Monday, India’s rupee fell and is now sitting at 69.9 rupee to the US$1. That’s the currency’s worst one day fall.

The South African rand also fell 10% on Monday.

Meanwhile, Wall St has also felt the effects. The Turkish lira plunge resonated on all global markets, with most sectors falling.

How will this affect Australia?

So how does this affect us here, in Australia?

Well, on Monday we saw the Australian dollar drop to an 18-month low in comparison to the US dollar.

And while Turkey and Australia aren’t huge trade partners, Turkey ranks at number 33 in Australia. And as reported by ABC News, ‘several Australian energy, construction, minerals and agribusiness companies have invested there and may be getting nervous.’

Several financial media outlets, such as The Australian Financial Review, have even blamed the rising tension between Turkey and the US as the reason for the global market fragility which saw mining conglomerates Rio Tinto and BHP fall on Monday.

So while Turkey isn’t a major trading partner with Australia, that doesn’t mean that Australia won’t get caught in the crossfire.

It’s only natural to be concerned about the state of the global markets. With Turkey on the cusp of financial capitulation, the global markets are starting to become vulnerable.

Kind regards,

Alana Sumic,
Editor, Money Weekend

PS: The growing Chinese middle class could translate into a massive investment opportunity for Australians. Get the details here.

Alana Sumic

As the Editor of the weekend edition of Money Morning, Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets.

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