Turkey The collapse of the lira is dangerous for the global economy
The weakness of the Turkish currency has serious consequences – not only for the people of Turkey. The crisis can also spread to other countries. The SZ answers the most important questions about it.
Markus Zydra writes as a finance correspondent in Frankfurt and reports mainly on the European Central Bank. He previously worked as an economics editor at the Financial Times Deutschland and FAZ. In the 1990s he was a Scandinavian correspondent for the Süddeutsche Zeitung in Stockholm.
US President Donald Trump’s announcement to double tariffs on steel and aluminum from Turkey has created panic on the currency markets – accelerating the crash of the Turkish lira. The currency lost massive value against the US dollar, peaking at more than 23 percent on Friday afternoon. This was the strongest daily loss since 2001. Trump’s announcement came as a complete surprise after the Turkish currency lost 13 percent that morning.
The weakening of the Turkish currency has serious consequences. Important import goods, such as medicines, are becoming more expensive. At the same time, the cost of loans in foreign currency, which many Turks have raised, is rising. The whole country relies heavily on money from abroad. Investors are demanding higher interest rates on their loans, defaults are looming, and there is a risk that the crisis will spread to other emerging markets as well. The SZ answers the most important questions about the financial crisis in Turkey.
What does the currency decline mean for the citizens of Turkey?
Foreign tourists can no longer afford many Turks, buying foreign currency has become too expensive. But even in their own country, prices are rising because of inflation. Especially food and energy, the things of daily use, become more expensive. That’s true for everyone. Many vent their anger with jokes. An up-to-date cartoon shows a greengrocer asking his customer if he should “pack as a gift” the kilo of potatoes she’s just purchased.
How Turkey crashed into crisis
The Turkish currency is on the decline, foreign investors are withdrawing their money and at the same time inflation is high. And then there’s a tweet from Donald Trump. more …
Does the IMF have to intervene now or can Turkey solve the crisis itself?
The IMF could help out with loans. However, conditions are always attached to such a rescue program. The Turkish government should implement economic reforms that the IMF requires. It is doubtful if Turkey will join. On the other hand, currency crises often develop a dangerous dynamic. Turkish citizens could exchange their lira savings in euros or dollars and transfer them abroad. This capital flight would weaken the country’s banking sector. In addition, Turkey relies on foreign loans, which provide the financial markets in these crisis situations only against extremely high interest rates. At some point, the time could come when Turkey can no longer pay for it.
How bad is the case compared to other emerging market crises?
The crisis in Turkey has just begun. With a few economic policies that restore confidence in the financial markets, they may be quickly halted. The bitter end of currency crises can be state failures, as in Argentina. It could then come to lengthy debt rescheduling negotiations with creditors. It is not excluded that many banks make losses in the end. The longer it lasts, the Turkish crisis could spread to other emerging economies. On Friday, the Russian ruble and the South African rand also depreciated. According to stockbrokers, the turbulence in Turkey was the trigger for this. The reason is chain reactions triggered by investors. When a newly industrialized country weakens, they also stop financing other emerging economies.
What does the financial crisis mean for German savers with accounts with Turkish banks?
Some German savers have invested their money in accounts of Turkish banks because there are higher interest rates there. These Turkish banks are based in the EU, but often outside Germany. “The risk for these savers lies not in Turkey or in the lira, but in the deposit guarantee system in Europe,” says Niels Nauhauser, financial expert of the consumer center Baden-Württemberg. Basically, the rule is that every saver in the EU is covered by 100,000 euros.
But Nauhauser warns: “We know that in a financial crisis or a major bank failure, the reserves of the Deposit Guarantee Fund are not enough to do that.” In the end, it would also depend on the political will and the financial strength of the state, whether savers would be compensated. “Whether the politicians use domestic tax money in case of doubt also for the compensation of foreign savers, is uncertain,” says Nauhauser. He gives the following advice: “We believe that savers in Germany have the greatest security when depositing their deposits with a bank affiliated to the domestic deposit guarantee scheme.”
How does the crisis in Turkey affect German and European banks?
The banking supervision of the European Central Bank has been examining for weeks the financial statements of institutions that have lent to the Turkish state, Turkish companies and companies. The Spanish banking sector has invested $ 82 billion in Turkey, according to data from the Bank for International Settlements (BIS). The French banking sector is sitting on $ 35 billion in claims and German banks have lent $ 17 billion to Turkey. There is currently no threat of a systemic threat to the European banking sector, but individual credit institutions could be in trouble in the event of a default by Turkey.
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The shares of Commerzbank and Deutscher Bank were carried along on Friday by concerns about Turkey. The courses dropped significantly. However, institutions are less affected than those in Spain, France or Italy. According to its interim report, Commerzbank has EUR 2.5 billion in credit or trade risk with its Turkish involvement. According to reports, however, it is above all short-term and largely secured trading business, which is why one does not worry too much about the bank. At Deutsche Bank, Turkey is not even listed under country risks in the annual report. According to banking circles, the risk is very manageable.
What consequences does the German economy have to fear?
In the first five months of the year, German exports to Turkey increased by nearly one-fifth compared to the previous year. However, a weak lira will make these exports more expensive in Turkey. In June they have already fallen by six percent. The dwindling purchasing power in Turkey is “bitter” for the German economy, according to the foreign trade association BGA. After all, Turkey is a major market for German exporters. Conversely, Germany is the most important export market for Turkey, and here too exports have recently risen. Turkish products become cheaper with a weaker lira. However, the country’s trade deficit with Germany is likely to continue to grow – and the confidence of German companies is dwindling. “The companies are unsettled by the resulting loss of confidence in the last two years,” says Volker Treier, foreign trade chief at the German Chamber of Industry and Commerce (DIHK).
“The key is that trust is restored.” According to DIHK figures, 6500 German companies are engaged in Turkey, they have around 120,000 employees. Only recently, the federal government had lifted the cap on the Hermes guarantees – after Ankara had lifted the state of emergency. The loans for the Turkish business are in demand: only in the US did the federal government take on more export cover in the first half of the year. However, many German companies in Turkey are feeling the crash of the lira in a completely different way: prepayments for their production, which they receive from the euro area, are now becoming more expensive – and with it the products. Meanwhile, the companies were waiting, says DIHK man Treier. “They are not withdrawing from the country yet.”