Like the fall of the Ottoman Empire after World War I, Turkey’s present financial collapse has been expected for years. The sloth of credit rating agencies and the laziness of bank credit committees allowed Turkey to struggle on a year or two longer than it should have, but the collapse of the Turkish lira this week after a long, sickening decline surprised no-one.
Turkey’s volatile president Recep Tayyip Erdogan might have put off the crisis, but instead decided to butt heads with US President Trump over the arrest of an American Protestant minister for alleged terrorism.
At 9:20 am Eastern time, Turkey’s lira was trading at 6.5 to the US dollar, or less than a third of what the currency was worth in 2014. Turkey’s economy is headed for extreme levels of inflation as the price of imports jumps, amid a severe contraction of output as the cost of production inputs rises out of the reach of Turkish businesses.
Turkey will end up as “an economic satrapy of China,” as I predicted last November. President Erdogan in effect threw himself on the mercy of China in a barely-coherent speech earlier today.
Turkey’s economy is likely to shrink by 10% to 20% before the bleeding stops, as I predicted June 12. Erdogan’s supposed economic miracle followed the old formula of Third World kleptocracies of the past, namely massive domestic credit issuance supported by massive foreign borrowing. Turks bought foreign consumer goods with the proceeds and the country’s current account deficit swelled to 6.5% of national output. That’s close to where the Greek current account deficit stood in early 2012 when the country’s economy imploded.
Turkish companies have borrowed roughly US$300 billion in foreign currency, and now have to repay it in devalued Turkish lira. Most of the debt was issued when the Turkish lira traded at less than 2 to the dollar. It now trades at more than 6 to the dollar, so the cost of debt service has tripled for Turkish borrowers with local-currency earnings.
Some of the lending was financed by Turkish banks who borrowed dollars or euro from other banks in the short-term interbank market and lent them to their customers. If Turkish banks can’t roll over their interbank exposure, the Turkish banking system will collapse. That won’t happen because Spain’s BBVA owns Turkey’s largest bank, Garanti.
The last time the Turkish lira blew up back in 2001, the country went to the International Monetary Fund for a loan and accepted strict austerity conditions in return for the bailout. Erdogan is unlikely to do so. In a rambling speech to supporters today, he said that Turkey was exploring alternatives with China, Russia, and Iran. Earlier in the week, Erdogan said that Turkey would issue so-called panda bonds in China’s local-currency market.
That’s just the door prize, judging from commentary on China’s English-language television channel CGTN. The Chinese broadcaster quoted Turkish economist Emre Alkin: “Stability for the Turkish Lira will come from cooperation with valuable countries like China. It’s impossible for the Central Bank to do something alone, resources are needed. If this resource will come from China, then it will come from China, but the important thing is to make use of this resource. It is clear we need the wisdom, the ideas and the suggestions of countries like China.”
Turkey will have to sell some of the state’s most important assets. With the Turkish lira trading at 6.26 to the dollar, the whole of the Istanbul 100 equity index is worth just US$35 billion. If Chinese investors were to buy every share of every company on the stock index, Turkey would raise enough foreign exchange to cover just seven months of its current account deficit. Turkey will have to sell a great deal more than its publicly traded companies to raise the money it requires, and it will also have to tighten its belt drastically.
Altay Atli, a Turkish economist and past contributor to Asia Times, told the Chinese television station that Turkey will offer China more partnerships in its ports and other transportation infrastructure. China’s state-owned shipping company COSCO Pacific already owns 65% of Turkey’s third largest port. Atli said, “I believe Turkey and China could also expand their partnerships in Turkey’s other ports, in the Mediterranean Sea, in the Aegean Sea, and at the Black Sea. And a critical move is not just to combine these ports with railway projects and extend the lines, but to create a logistical network.”
China has the opportunity to undertake the Sinification of Turkey at low cost. China’s largest telecom equipment company Huawei already is working on 5G Internet with Turk Telecom, in a deal covering cloud computing, the Internet of Things and – most importantly – public security. Alibaba, China’s answer to Amazon and Google, invested earlier this year in Turkey’s e-commerce platform Trendyol.
The combination of mobile broadband, rail and sea logistics, e-commerce and e-finance will absorb Turkey into the greater Chinese economy. Not long from now containers of Chinese-made parts will arrive by rail in Anatolia for assembly into finished products to be sold in Europe and the Middle East.
President Erdogan will be able to shake his fist at Washington and talk of Turkish national pride, while turning his country into a satrapy of China.
Beware, according to the Western medias, Chinese loan is debt trap; while IMF and World Bank loans are not. What do you prefer?
Hmm….. before you know it it will be close to 10 to 1, that does not mean Turkey is a safe place to retire. It will always be unstable, until Erdogan is 6 ft. under as well as his party leaders and family members. Food for thought.
The Chinese panda, is as wild and as unpredictable as any wildlife is, do not step on Xi’s toes, you will regret it and there’s no turning back. Xi will have Er Dog Gone for lunch as an appetizer.
Trump and Erfogan are on a collision course, Who will tun to insurer first?
Michael Walsh We all know that, like any other financing. the Chinese loans come with strings attached. What the others are saying here is that the Sri Lankans are perfectly cool with how their deal has worked out with the Chinese. As long as their ports are operational, they don’t care who actually owns them. I suspect it will be the same with Turks.
Many of these articles make it sound as if China is acting hegemoically that everything geopolitical is a zero sum game. China only looks agressive just now because of all the opportunities open to it by Trump’s mistakes. The US led Empire of the Exceptionals is the last of the European Empires and perhaps the era of Empire will be over when it finalley dies. China, Russia, India no potentially empiral country is in the least interested, the trend now is economic harmonization.
Well said…
But I thought you thought China is so much better and moral than the USA ?
Mahendra Pratap Singh ….whole islamic world is in turmoil n meltdown..in 10 year they will be ONLY FIGHTING…with bare hands.
Quite a difficult Choice.He has to keep Turkey Floating,One Way OR the Other.
My goldman is confirm zionst and imperialist a person who do not like other people have other avenue other than IMF which is a zionst entity they want others to be salve is USA
Definitely, China headed by Xi, is a very reliable partner, this partner will screw you day and night 24/7, while it has you in a chokehold.
Falk Rovik lol
The way some nations speak about China being the solution whenever such nations fall out with America is very unfortunate and laughable. These countries thing China is a father chrismas. Within time they will know that there is no difference between China and Trump America.
You are biased
Well , Brexit in UK and election of Trump are stiched in the same mental make up. In case of UK , millions of Pounds are drained to EU everyday and EU member citizens are snatching all the jobs . In USA whites were told US is giving away everything under Democrat leadership ; under NATO banner US is wasting resources to save Europe , China and outside world are killing American jobs etc . Ruhul Amin
so what, GOLDMAN? if turks decide to sinify, why are you jittery?
oh, i didnt know millions of iraquis and afghans died because of erdogan and not the lying fanatics called bush and blair. you seem to have acquired quite a few of those WMDs, right?
you owned him, Bob!
There are no free luncheons. Turkey should not put all its eggs in one basket.
Michael Walsh, well I’m Sri Lankan and have a different opinion. Investment on the deep sea port located directly on the busiest shopping route in the world makes us an even more competitive logistics hub. BEsides, the debt for constructing the port was written off against management right for 25 years, during which time too it’s not a Chinese monopoly. Japanese and Singaporean logistics parks have been designated ina massive hub associated with the port already and SLPA owns a portion of it all along.
Avi Semo yes 100% correct
Those who has came to pover with the helps of USA led western powers can not make their own decisons , jus act on the decision made for them.