World markets brace for impact of Turkish lira crisis


World markets brace for impact of Turkish lira crisis

Nick Beams

13 August 2018

The key question in major financial markets when they open for trading today will be the impact of the ongoing Turkish financial and currency crisis amid warnings that it could have far-reaching global implications.

The New York Times economics columnist Paul Krugman, in a piece published over the weekend, said that the Turkish lira plunge was a re-enactment of the Asian financial crisis of 20 years ago.

One of the world’s largest bond trading companies, Pimco, has warned that the Turkish crisis is the outcome of a shift in the global financial environment resulting from the increase in US interest rates by the Federal Reserve and the winding down of its holdings of financial assets.

The increase in interest rates heavily impacts on countries, like Turkey, that took out dollar-denominated loans when they were low. As US interest rates and the dollar start to rise, the cost of servicing those loans increases, raising the prospect of bankruptcy for borrowers.

Turkey has been a major borrower on international markets with a total foreign debt of $467 billion.

In a note issued on Sunday, Joachim Fels, global economic adviser at Pimco, wrote: “This looks like another example of how a combination of bad domestic economic policies turning worse and deteriorating global liquidity that makes bloated dollar-funded balance sheets vulnerable can produce high volatility and contagion.

“Who said shrinking the Fed’s balance sheet and raising the funds rate in a gradual fashion wouldn’t have global implications?”

The European Central Bank has put on watch major European banks that are heavily exposed to Turkish debt. They include Spain’s BBVA, which has lent Turkey $83.3 billion, Italy’s Unii…

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