Current Problems Turkey is Facing! Here are a few of them!

Turkish ShockIt has almost been a month since the shock.

USD/TRY rose back for a moment, but it has continued to drift lower, approaching the shock-era low.

This weekthe Turkish policy rate will be announced. I would like to summarize the current situation in Turkey.

USD/TRY four-hour chart

↓↓↓ For details on the Turkish shock, refer to the articles below ↓↓↓

Turkish Lira Crash! Turkey Shock of August 10, 2018 – Summary

Continued: Turkish Shock Summary. The Turkish problem is not just Turkey’s issue!!

Key points of the Turkish situation

1) Inflation keeps rising (Inflation rate)

2) This week's policy rate!

3) Turkey is becoming increasingly isolated

4) External debt problem

1)Inflation keeps rising (Inflation rate)

Amid ongoing inflation,the president does not want to raise policy rates. Since the abolition of the prime minister post and concentration of presidential power was decided last year,markets have focused on the independence of the central bank. However, the central bank has struggled to raise rates.It appears to be yielding to presidential pressure,and the lira came under selling pressure, weakening further. This decline in the lira feeds a negative inflation spiral.The Turkish central bank has been playing catch-up placement.

2)This week's policy rate!

This weekon the 13th, all eyes are on the Turkish policy rate announcement. To curb inflation, a substantial rate hike is necessary. Also, to stop the outflow of funds and prevent further lira depreciation, a large rate hike is needed.How much will they be able to raise? The market is watching closely.

Meanwhile, Turkish Finance Minister Albayrakspoke about the independence of the Turkish central bank,and that they will do anything to stop the lira’s decline. This statement, in my view, raises the hurdle for a further rate hike by the central bank. Analysts at banks and securities firms are divided.Predictions range from to hold to a 5.0% rate hike, completely dispersed. It is therefore difficult to forecast. If the market prices in only a half-hearted rate hike, the lira is likely to fall again.

3)Turkey becoming increasingly isolated

President Erdogan of Turkey is at odds with President Trump. Turkey has long pursued EU membership, but it proved impractical. In the end, in the Syria conflict, Turkey moved closer to Iran and Russia, but did not succeed.Ultimately, discussions with the US began. It seems on the 4th, Secretary of State Pompeo and Turkish Foreign Minister Cavusoglu started talks. Naturally, discussions include the issue of pastor release alongside the civil war issue.

Furthermore, talks with Germany appear to be ongoing, but they seem reluctant on military civil war issues.

4)External debt problem

Personally,the external debt problem is the deepest and most impactful, I think. Turkey runs a current account deficit. Income and expenditure are in deficit. Therefore, it borrows, including from overseas banks. According to JPMorgan, by July 2019$179 billion must be repaid. Of that,$146 billion is borrowed by private banks.Private banks operate in lira, so when the lira falls, the repayment amount increases.The lira has fallen about 50% over the past year. Simply put,the repayments have effectively doubled. Private banks are in a difficult position.

The policy rates above are also important for private banks. If the lira continues to weaken, repayment amounts will rise further and they may not be able to repay.

This concern about repayment is particularly held by Europe. Specifically Spain and Italy. Other European banks also hold Turkish debt, but Spain and Italy in particular hold a large amount of Turkish bonds. Therefore, Turkey’s crisis translates into a European crisis. Currently, the decline in the Turkish lira is correlated with the long-term yields of Spain and Italy.

Going forward,how debt issues will be handled...

Turkey does not want IMF assistance. It gained support when it left IMF aid, under Erdogan. Now, it is hard to imagine seeking IMF support again.

For Turkey, I think they will seek help from Europe, starting with Germany. European countries have some moral obligation due to pushing refugees onto Turkey, Italy, and Greece. Also, Turkey hoped for EU membership as a response to the refugee issue, but it did not come to fruition. Therefore, I think Turkey will use the refugee issue as leverage to negotiate its debt problems.

This turned into a long discussion, but the policy rate issue this time is not only about the lira’s decline; it is an important announcement affecting Turkish bonds and Europe as well!!

I will be watching the future developments closely.