Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Turkey Faces An Economic Dilemma That Will Have Global Implications

Politics / Turkey Nov 09, 2017 - 03:45 PM GMT

By: John_Mauldin

Politics

BY GEORGE FRIEDMAN AND XANDER SNYDER : A country’s decision to borrow money is not always strictly economic. Take Turkey, whose ratio of gross external debt (all public and private sector debt) to GDP has jumped from 39% in 2012 to 52% today.

Turkish President Recep Tayyip Erdogan has been pushing to increase available credit to spur economic activity. This is a political goal, though one motivated by economic objectives.


But Erdogan found that there was not enough domestic capital available to meet Turkey’s lending needs.

Borrow Domestically or from Abroad?

When a country chooses to borrow, it has two sets of choices.

First, should it borrow domestically or from abroad? Second, should its debt be denominated in domestic or foreign currency? Each option has its own implications, but it is particularly constraining when a country borrows from abroad in a foreign currency.

When debt is borrowed in another country’s currency, the borrowing country no longer has the option to depreciate its own currency through monetary policy in order to decrease the relative value of its debt.

The other risk involved in foreign currency borrowing is that the borrower’s currency will decline in value and increase the cost of debt service.

For example, if a country borrowed $100 million at 10% in US dollar-denominated debt, it would owe $10 million per year.

If the exchange rate between the borrower’s currency and the dollar is 2 to 1, then that $10 million is equal to $20 million of its own currency per year.

But if its currency depreciated and the exchange rate to the dollar became 4 to 1, it would still owe $10 million, but in terms of its own currency, that figure would be $40 million in debt service per year.

Turkey’s Dilemma

The pitfalls of borrowing in foreign currency are clear. But for Turkey, domestic borrowing is not a sufficient option.

Banks lend money that is entrusted to them in the form of deposits. The quantity of deposits is determined by a society’s proclivity to save. If deposits are lacking, then the bank will have only so much domestic capital to lend.

Herein lies Turkey’s dilemma: The government wants to boost economic growth by extending greater credit to encourage investment, but there isn’t enough domestic capital in the banks to meet these goals.

Turkey’s solution to this capital shortfall has been external borrowing, though with some restrictions.

Households are not allowed to take out consumer debt that is denominated in foreign currency. Instead, it is mostly financial institutions that borrow in foreign currency—mainly US dollars and euros. And once the capital flows into Turkey, banks extend credit domestically in Turkish lira.

With this maneuver, Turkey accepts greater long-term financial risk for short-term economic growth. More credit is available for projects now. But with every borrowed dollar or euro, Turkey faces a greater financial burden should the lira’s value fall relative to the dollar or euro.

Erdogan, who overcame a coup attempt just last year, cannot afford the risk to his presidency that a flailing economy would create. Maintaining positive economic momentum is critical to ensuring the continued support of his base.

Global Implications

The need to maintain a strong lira while keeping credit freely available has opened somewhat of a rift between Erdogan and Turkey’s central bank.

The bank sees the abundance of credit and growing inflation as a threat to the lira’s strength—and thus Turkey’s ability to service its foreign debt. So it wants to increase interest rates.

But higher rates mean less credit, and Erdogan needs to keep the debt tap open to prevent an erosion of his control over the country.

Turkey’s problems aren’t just its own. Turkey has the 17th-largest economy in the world. If it were to falter, the implications for its lenders would be severe. But its finances also affect regional security (I wrote about the balance of power in the Middle East and Turkey’s role in the region in my free exclusive e-book, The World Explained in Maps, which you can download here).

If Turkey is financially stable and politically united, it can turn its gaze outward and try to exert greater control over its near abroad.

But if Turkey’s financial system is compromised in a run on foreign exchange reserves, then its economy will be threatened. In turn, Turkey could lose its ability to maintain its ever-growing military deployment in Syria.

Without a Turkish presence in western Syria, Iran, which has been Turkey’s rival since the days of the Ottoman Empire, would have a freer hand to influence areas farther west in Syria—areas that Turkey would prefer it to stay out of.

Turkey’s approach entails greater, but not unmanageable, risk. Should it fail, such as in the event of a rapid fall in the value of the lira, Turkey’s financial system—and thus its immediate ability to project power—would be weakened.

Grab George Friedman's Exclusive eBook, The World Explained in Maps

The World Explained in Maps reveals the panorama of geopolitical landscapes influencing today's governments and global financial systems. Don't miss this chance to prepare for the year ahead with the straight facts about every major country’s and region's current geopolitical climate. You won't find political rhetoric or media hype here.

The World Explained in Maps is an essential guide for every investor as 2017 takes shape. Get your copy now—free!

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in