Latest / Trumponomics / What You Need to Know About Turkey's Financial Crunch

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What You Need to Know About Turkey's Financial Crunch · Trumponomics

• 0:01
  Speaker 1: Hey, Benchmark listeners, it's scott landman. Here. Just a quick
• 0:05
  Speaker 1: note before we start the show. This episode covers Turkey's
• 0:09
  Speaker 1: recent economic woes. It's a fast moving story and after
• 0:13
  Speaker 1: recording our interview for the episode, news broke that Cutter
• 0:17
  Speaker 1: has promised to invest fifteen billion dollars in the country
• 0:20
  Speaker 1: to help pull it out of its financial straits. While
• 0:24
  Speaker 1: we don't go into that matter on this podcast, that
• 0:27
  Speaker 1: move could help alleviate Turkey's financial crunch, but it probably
• 0:32
  Speaker 1: won't solve the bigger challenges facing Turkey. To hear more
• 0:36
  Speaker 1: about those bigger themes, keep listening to this episode and thanks.
• 0:42
  Speaker 1: When a country's currency is plunging in value and inflation
• 0:46
  Speaker 1: is soaring, there's a standard playbook for what policymakers should
• 0:50
  Speaker 1: do about it. You have to swallow your medicine and
• 0:52
  Speaker 1: raise interest rates really really high. In Turkey, the lira
• 0:57
  Speaker 1: has lost of its value this year, the most of
• 1:00
  Speaker 1: any emerging market. Yet it's strongman leader, President Reje taip
• 1:05
  Speaker 1: Er Towan says lower interest rates actually bring down inflation.
• 1:10
  Speaker 1: Is it possible that he's right and this will all
• 1:12
  Speaker 1: blow over? Or is the world staring down the barrel
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  Speaker 1: of the biggest financial crisis in a decade, one that
• 1:18
  Speaker 1: has major geopolitical implications as well. Welcome to Benchmark. I'm
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  Speaker 1: Scott Lanman, Economics editor with Bloomberg News from Washington. This
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  Speaker 1: week we turned to Turkey, where things are moving fast,
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  Speaker 1: and it's good to have someone there to help us
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  Speaker 1: sort through everything that's happened and even maybe help us
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  Speaker 1: figure out what is going to happen next. Owner On
• 1:48
  Speaker 1: is a reporter for Bloomberg News based in the nation's
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  Speaker 1: capital of Ankara, where he's had a front row seat
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  Speaker 1: to the financial and economic turmoil there. Owner. Welcome to Benchmark.
• 1:58
  Speaker 1: Thanks God, it's great to be yere. Owner. Can you
• 2:01
  Speaker 1: just tell us why Turkey's currency is collapsing and why
• 2:05
  Speaker 1: inflation is soaring? But the most obvious trigger for the
• 2:10
  Speaker 1: latest round of lear weakness has been dispat with the
• 2:16
  Speaker 1: US over the continued detention of an American pastor, Mr
• 2:20
  Speaker 1: Mr Andrew Bronston in Turkey, who spent many two years
• 2:24
  Speaker 1: in the jail here in Turkey over charges to ladd
• 2:27
  Speaker 1: to espionage and terrorism. Having said that the problems of
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  Speaker 1: the Turkish currency, the Lira, is more complicated than fundamental
• 2:37
  Speaker 1: than just what the US spat is all about Turkey
• 2:42
  Speaker 1: has a large current account deficit which is seeing expanding
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  Speaker 1: the six points or per cent of its economy by
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  Speaker 1: the end of this year. And the fact that Turkish
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  Speaker 1: non financial and financial companies have quite a bit of
• 2:58
  Speaker 1: repayment to do over the next twelve months and final
• 3:03
  Speaker 1: exchange are the key vulnerabilities of the economy that is
• 3:08
  Speaker 1: causing pressure on the currency at times of stress such
• 3:12
  Speaker 1: as the current one. And isn't this also due to
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  Speaker 1: you know, let's say, a non traditional policy approached by
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  Speaker 1: President Urdawan and who controls the central bank. Right now,
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  Speaker 1: let's put it this way, the unorthodox policy approach that
• 3:29
  Speaker 1: Dan has to economy in general and Monstro policy in
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  Speaker 1: particular definitely has a role play in what's happening to
• 3:37
  Speaker 1: the Leila and to infallation in general. Now, although their
• 3:41
  Speaker 1: extensive banks is independent and it's free to use its
• 3:48
  Speaker 1: montro policy instruments to achieve its target, we know that
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  Speaker 1: the bank has long been criticized for failing to use
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  Speaker 1: its instruments freely. Are under pressure from politicians led by
• 4:02
  Speaker 1: present there the one, as you have said earlier, Present Air,
• 4:06
  Speaker 1: do one believes that lower costs of borrowing, we'll just
• 4:13
  Speaker 1: result in a lower rate of consumer inflation. Now that's
• 4:19
  Speaker 1: really an extraordinary idea in the sense that it goes
• 4:23
  Speaker 1: again the mainstream economic thinking. Normally, higher lending costs should
• 4:30
  Speaker 1: result in lower credit growth and flower demand growth, which
• 4:35
  Speaker 1: should result in a flower right in consumer prices. But
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  Speaker 1: for air do one that doesn't seem to be the case.
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  Speaker 1: So where are turkeys interest rates right now? The average
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  Speaker 1: cost of funding that the Turkish Center Bank provides is
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  Speaker 1: now just around seventeen point seventy five, which equals its
• 4:57
  Speaker 1: benchmoint policy rate. Now that might be small, minor volativity
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  Speaker 1: from small variations from day to day, but this this
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  Speaker 1: Turkey's interest rate, and it's about five percentage points higher
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  Speaker 1: than where the rates were at the beginning of this year.
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  Speaker 1: And where do analysts and economists think that interest rates
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  Speaker 1: should be in order to better address the issues that
• 5:23
  Speaker 1: we've been discussing. It's a very difficult question to answer
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  Speaker 1: for a few reasons, and the first and most important
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  Speaker 1: one is the fact that traders and analysts and invested
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  Speaker 1: that we're speaking with around the world have been telling
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  Speaker 1: us that it is impossible, nearly impossible, to fix the
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  Speaker 1: problems facing the Turkish era at the moment with a
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  Speaker 1: monetary policy action alone. Because of the complexity and the
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  Speaker 1: gravity and the magnetitude of the problems facing Turkey's economy,
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  Speaker 1: it would probably take more than justice sense of bank
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  Speaker 1: action to fix the problems of the lira and stabilize
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  Speaker 1: the currency, and what other actions with those possibly be.
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  Speaker 1: Investors believe for Turkey to be able to stabilize the vira,
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  Speaker 1: first of all, it needs to augment any monastery tightening
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  Speaker 1: with lower government spending. Without meaningfully tightening the fiscal policy,
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  Speaker 1: analysts and investors believe that they're going to be continued
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  Speaker 1: inflationary pressure that will make it really difficult for policy
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  Speaker 1: makers to reign in consumer prices. Owner, can you tell
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  Speaker 1: us a little bit about how this is all affecting
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  Speaker 1: the average citizen and Turkey are Are they paying a
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  Speaker 1: lot more for goods or their daily lives right now
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  Speaker 1: or has it not really gotten to them yet. The
• 6:55
  Speaker 1: recent depreciation in the currency has yet to feed into
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  Speaker 1: consumer price it on a meaningful scale. However, having said that,
• 7:04
  Speaker 1: because of the fact that the lyra lost about it
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  Speaker 1: quarters of its value in just about two weeks, there's
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  Speaker 1: going to be a spillover impact very soon. Based on
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  Speaker 1: studies by the Central Bank and others who monitorors economy,
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  Speaker 1: we know that most of the splower two takes place
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  Speaker 1: in the first two months following the episode of depreciation.
• 7:28
  Speaker 1: So two, actually consumers are definitely being hurt by what
• 7:32
  Speaker 1: was already a high level of installation rate, but they
• 7:36
  Speaker 1: have yet to feel the pain from the most recent
• 7:40
  Speaker 1: episodes of lilar weakness. That brings me to our next question,
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  Speaker 1: which is that the big news as we're talking right
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  Speaker 1: now is that President Urdwan has announced that Turkey will
• 7:52
  Speaker 1: boycott iPhones and all other American electronics. Is that going
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  Speaker 1: to cause some more pain for people in Turkey or
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  Speaker 1: is that really just kind of a show that Urdue
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  Speaker 1: is making that he opposes America's actions on this and
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  Speaker 1: what President Trump has done to raise tariffs on Turkish medals.
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  Speaker 1: It certainly has a symbolic value for President either one.
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  Speaker 1: On the other hand, it is going to change things
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  Speaker 1: for churchs who are willing to abide by Adolan Schole
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  Speaker 1: to boycott American electronics. Now, on the one hand, obviously
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  Speaker 1: it would be difficult to say goodbye to your iPhone
• 8:30
  Speaker 1: if you're really addicted to it. But on the other hand,
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  Speaker 1: the alternatives that turks us such as the Korean made
• 8:38
  Speaker 1: some songs that everyone sided in this speech, or Turkish
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  Speaker 1: cool themselves iPhone, it actually wouldn't cost consumers more, it
• 8:47
  Speaker 1: would instead cost less. Now, how do you define pain
• 8:53
  Speaker 1: for consumers? Really? Is the answer to your question. People
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  Speaker 1: may be paying less, but will they really be happy
• 9:01
  Speaker 1: with something that they had to basically throw away because
• 9:06
  Speaker 1: of they called by the president, which they don't have
• 9:08
  Speaker 1: to bide by, but they may choose to build. So owner,
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  Speaker 1: you've spent some time covering some major international meetings like
• 9:18
  Speaker 1: the International Monetary Fund and the Group of twenty, which
• 9:23
  Speaker 1: was just in Turkey not too long ago. How do
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  Speaker 1: you expect these organizations, you know, these these global policymakers
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  Speaker 1: to react and deal with Turkey situation in the coming months.
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  Speaker 1: Is there any chance, for instance, that the i m
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  Speaker 1: F would consider a bailout for Turkey if things got
• 9:43
  Speaker 1: really bad. I think a precondition for any possible i
• 9:47
  Speaker 1: MS bailouts would be a request by the turchi comment
• 9:52
  Speaker 1: to the to the Washington based lender. Now, as far
• 9:55
  Speaker 1: as we know, there has been no such request made
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  Speaker 1: to the i m S as recently as today, not
• 10:03
  Speaker 1: only that President has repeateously rejected the notion that Turkey
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  Speaker 1: would be forced back to the i m F for
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  Speaker 1: any international bailout package. Now what does what does that
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  Speaker 1: really mean for the relationship between Turkey and the I
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  Speaker 1: m S. It's a tricky question. Turkey has lived with
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  Speaker 1: the i m F reality for decades and it's most
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  Speaker 1: recent stand by agreement ended less than a decade ago,
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  Speaker 1: and the last time Turkey repaid an installment on an
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  Speaker 1: earlier i m F one was just five years ago.
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  Speaker 1: But for everyone, I m F bailout and i m
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  Speaker 1: F programs are just part of the equals is to
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  Speaker 1: chilage or in other words, he sees any engagement with
• 10:51
  Speaker 1: those institutions an organization in the form of aslone. He
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  Speaker 1: sees them as vowing to an instrument of international exploitation,
• 11:06
  Speaker 1: so to speak. So it's right now, as things said,
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  Speaker 1: it looks very unlike before President A one to order
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  Speaker 1: his bureaucrats to get in touch with the Borhingin based
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  Speaker 1: foot slender so that Turkey can get the money and impact.
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  Speaker 1: To be honest, and this comes from the various official
• 11:23
  Speaker 1: and both Turkish internacial ships that we speak with. Although
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  Speaker 1: Turkey does have funding needs, it does not have the
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  Speaker 1: kind of funding shortage that would force it to seek
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  Speaker 1: such rescue package to begin with. And in any case,
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  Speaker 1: I just read a note from Barrenburg Bank economist Mickey
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  Speaker 1: Leavey saying that President Trump would by no means support
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  Speaker 1: of bailout for for Turkey anyway, given that this is
• 11:53
  Speaker 1: coming from a dispute between the United States and Turkey,
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  Speaker 1: so it's probably a moot question anyway. And on that note,
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  Speaker 1: let's just talk about the broader situation in the world.
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  Speaker 1: There was some concern last week when this situation really
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  Speaker 1: blew up with Trump's tariffs on Turkey, and it looked
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  Speaker 1: like there might be some contagion to emerging markets, that
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  Speaker 1: we might have something that resembled, say, the Asian financial
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  Speaker 1: crisis of the late nineties. Maybe maybe not as bad
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  Speaker 1: as the global crisis a decade ago, but still something
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  Speaker 1: that was starting to look bad. Why will there or
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  Speaker 1: will there not be a spreading of this budding crisis
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  Speaker 1: to other countries. Is this something that's likely to be
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  Speaker 1: confined to Turkey or could it spread? Judging from the history,
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  Speaker 1: we know that the Turkish currency does have an impact
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  Speaker 1: on other EM currency in the sense that whenever it
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  Speaker 1: comes under pressure, similar amount of pressure built on some
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  Speaker 1: of the other EM currencies to the South Africa rent.
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  Speaker 1: So that's a risk to keep in mind. Something even
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  Speaker 1: more important is the exposure of international banks two Turkeys
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  Speaker 1: local banking sector, especially that of the European banks. We
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  Speaker 1: so from data provided by different Financial Aggravations earlier this week,
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  Speaker 1: European banks exposure to Turkish local market is so huge
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  Speaker 1: that it is actually considered to be a possible force
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  Speaker 1: of a risk in the case of added pressure in
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  Speaker 1: Turkish economy. In fact, last week the FT reported that
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  Speaker 1: European Central Banks is concerned about the exposure of at
• 13:41
  Speaker 1: least couple of European banks, namely b MP and and
• 13:47
  Speaker 1: b b b A of Spain. So there is certainly
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  Speaker 1: a risk out there at risk of contagion. How much
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  Speaker 1: it really is and how seriously it should be taken,
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  Speaker 1: I guess it's called to be something that people will
• 14:01
  Speaker 1: try to out there going forward. Good. Right now, it
• 14:04
  Speaker 1: doesn't seem to be an imminent huge amount of risk. Well, owner,
• 14:09
  Speaker 1: this story is obviously far from over and something we're
• 14:12
  Speaker 1: going to be watching closely. Of course, at Bloomberg and
• 14:16
  Speaker 1: I will personally be reading your coverage very closely and
• 14:20
  Speaker 1: that of your colleagues in Turkey. So owner on of
• 14:23
  Speaker 1: Bloomberg News, thank you so much for taking the time
• 14:26
  Speaker 1: to join us on Benchmark today. Thank you, Scott, it
• 14:29
  Speaker 1: was great to be with you here. Benchmark will be
• 14:41
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• 14:44
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• 14:47
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• 14:51
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• 14:53
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• 14:56
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• 14:59
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• 15:04
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• 15:08
  Speaker 1: head of Bloomberg Podcasts is Francesca Levy. Thanks for listening,
• 15:12
  Speaker 1: See you next time.