Short thread on what's going on in Turkey, and whether it matters for the rest of us. The country looks like it's in the early stages of a currency crisis. Stock market is (in $ terms at least) down to the lowest level in nearly a decade 1/ 
In some senses, Turkey was always a candidate for a crisis like this. It had some (if not all) of the ingredients. The biggest current acc deficit in the developed world. And the highest inflation rate... 2/
Turkey is one of the most exposed countries in the world to fluctuations in the dollar as it has enormous amts of dollar debt. That means any fall in the lira has major knock-on consequences. Useful chart on that here from the IIF: 3/
Turkey has rubbed along OK despite some mildly scary economic traits for a while, so why a crisis now? In part the story goes back to the attempted coup of July 2016. Following that, Pres Erdogan doubled down on what some call populist/authoritarian policies 4/
He jailed more political opponents (inc an American pastor he sees as partly culpable for the coup), he started to splurge a lot of public money to create an economic boom. And boy did he succeed. Turkey is now at the very point when boom turns to bust... 5/
The Turkish central bank should have raised interest rates ages ago to bring the boom to an end. But (continuing the populist/authoritarian theme) Erdogan has said explicitly that it should not. Striking example of that in this Bloomberg i/v from May bloomberg.com/news/articles/… 6/
Not long ago investors (& politicians) couldn't get enough of Turkey. It was an econ success story. Since the coup it's become nearly impossible to make that case. A scary boom. A president bullying the central bank. A less open media environment... 7/
Then the final straw last wk: Donald Trump intervening with sanctions on Turkish steel/aluminium. Why? Again it comes back to the coup and in this case Erdogan's decision to detain that American pastor. It was that US intervention which caused the VERY sudden fall in the lira 8/
How does this end? Prob Erdogan will have to endorse higher int rates & lower govt spending or there's a good chance the crisis intensifies, which may mean an IMF bailout. There's talk of capital controls but they're rarely more than a sticking plaster solution in these crises 9/
What abt knock-on consequences? Some EU banks exposed. Esp BBVA & Unicredit. Couple of useful tables on this attached. BUT NB much of their lending is in lira so contagion risk not quite as bad as in Greek crisis 10/
Yes I know I said it was a "short thread". I was wrong. Sorry
Yes I know I said it was a "short thread". I was wrong. Sorry
More broadly, we're probably likely to see more of these crisis in emerging economies as the US Federal Reserve raises interest rates, making life for all dollar-exposed economies much more difficult. That was at least part of Turkey's problem... 11/
The most ironic thing abt Turkey's current crisis is that so many of the root causes (not all but many) can be traced back to aftermath of the 2016 coup. Pres Erdogan may have survived that coup but it's by no means guaranteed that he will survive all the aftershocks...
Turkey's debt boom in two scary charts. Massive increase in lending to households and businesses. All the more reason why interest rates (probably in 20-25%) may be needed. Charts by Graham Turner
