When the aspiring Sultan of neo-Ottoman Turkey, Erdogan, called early presidential elections, nuanced observers pointed out he probably knew in advance that the Turkish economy was about to enter a severe recession, and he wanted to secure his near-dictatorial presidential powers before the deluge set it. It is now setting in , with a vengeance. The country’s fragile currency, the Lira, continues to erode at breakneck speed. On August 12, it plummeted to just above 7 to one U.S. dollar.
Turkey’s high growth rates under Erdogan were illusory; they were fed by massive borrowing from foreign banks, the loans denominated in dollars and euros. The collapse of the Turkish Lira leaves open the probability that foreign credit will disappear, battering the Turkish economy with severity.
Turkey’s looming economic and financial collapse cannot be easily contained. Many banks, especially in Europe, hold Turkish debt in large quantities. An economic collapse in Turkey will have highly negative ramification in Europe, and likely globally.
The Turkish currency, the Lira, has lost significant value in a only a few months, reflecting the overall vulnerability of Turkey’s economy, which is plagued with corporate debt and a massive current account deficit.
The mercurial and authoritarian president of Turkey, Erdogan, is facing an election in which he hopes to further enhance his already powerful political grip. His strategy is to play the populism card, and lash out at foreigners, including the United States, European Union and Israel. Part of this approach is blaming the “interest lobby,” and in a shocking display of bad economic sense, Erdogan, while on a visit to London, told foreign investors that after the election, he would subvert the independence of Turkey’s central bank.
The moves by Erdogan spooked global investors, leading to further erosion of the Lira. Reality briefly surfaced in Ankara, with even the Erdogan regime conceding that the central bank had to rush in an emergency interest hike of 300 basis points. This led to a temporary stabilization of the Lira.
After the election Turkey faces political and economic uncertainty. The growing authoritarianism of Erdogan threatens the foundation of Turkey’s economy, and there exists a major danger that after the election, the Lira will go into free-fall as foreign and domestic investors flee Turkey’s increasingly fragile currency.