“Unless Erdogan Changes Course,” El-Erian Warns Of “Much Wider Damage… Not Just In Turkey”

Friday, August 17, 2018
By Paul Martin

by Mohamed El-Erian via Project Syndicate,
Fri, 08/17/2018

Rather than sticking with the approach taken by numerous other countries – including Argentina earlier this year – by raising interest rates and seeking some form of IMF support, Turkey has shunned both in a very public manner. Unless it changes course, the government risks much wider damage – and not just in Turkey.

Whether by accident or design, Turkey is trying to rewrite the chapter on crisis management in the emerging-market playbook. Rather than opting for interest-rate hikes and an external funding anchor to support domestic policy adjustments, the government has adopted a mix of less direct and more partial measures – and this at a time when Turkey is in the midst of an escalating tariff tit-for-tat with the United States, as well as operating in a more fluid global economy. How all this plays out is important not only for Turkey, but also for other emerging economies that already have had to cope with waves of financial contagion.

The initial phases of Turkey’s crisis were a replay of past emerging-market currency crises. A mix of domestic and external events – an over-stretched credit-led growth strategy; concerns about the central bank’s policy autonomy and effectiveness; and a less hospitable global liquidity environment, owing in part to rising US interest rates – destabilized the foreign-exchange market.

A political spat with the US accelerated the run on the Turkish lira by fueling a self-reinforcing dynamic. And all of this occurred in the context of a more uncertain and – aside from the US – weakening global economy.

In keeping with the traditional emerging-market-crisis script, Turkey’s currency crisis spilled over onto other emerging economies. As is typically the case, the first wave of contagion was technical in nature, driven mainly by generalized outflows from Turkey’s currency and bond markets. The longer this contagion continues, the greater the concern that it will lead to more disruptive financial and economic outcomes. As such, central banks in several emerging economies – as diverse as Argentina, Hong Kong, and Indonesia – felt compelled to take counter-measures.

What has followed is what makes this episode of emerging-market crisis different, at least so far. Rather than sticking with the approach taken by numerous other countries – including Argentina earlier this year – by raising interest rates and seeking some form of support from the International Monetary Fund, Turkey has shunned both in a very public manner, including through strident remarks by President Recep Tayyip Erdoğan.

Facing an accelerated exchange-rate depreciation that, at one stage, almost halved the lira’s value, Turkey has taken a variety of measures that attempt to simulate – albeit partially – the traditional approach that emerging economies have tended to follow in the past.

Domestically, it tightened funding conditions and, at the same time, provided liquidity to domestic banks, along with regulatory forbearance. It made it harder for foreigners to access lira liquidity, thereby squeezing speculators that had shorted the currency. It promised to deal with credit and fiscal excesses while ruling out capital controls. Externally, the government has mobilized at least $15 billion from Qatar to be used for direct investment in Turkey. And, in the midst of all this, the government also found time to retaliate against the doubling of tariffs on Turkish metal exports by US President Donald.

The Rest…HERE

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