Watching the Turkish Lira’s collapse today, the thought that keeps popping in my head is “live by financial markets, die by financial markets.” +
For years, Erdogan was given a very long leash by financial markets, as his unsustainable macro policies were supported by external inflows, attracted by the short-term yield gap. +
One of the myths of financial globalization is that it enforces macro discipline. In Turkey, it was the opposite. Turkey’s economic experiment ran much longer than it should have thanks to the more elastic supply of finance. The economic costs will be larger as a result. +
With the pandemic and drying up of emerging market finance, Turkey already had to engineer a sharp turnaround on the current account. Now domestic savers have had enough too. +
And with monetary tightening looming in the US, it will be difficult for Erdogan to stabilize the Lira yet again. Live by financial markets, die by financial markets. END
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