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.
Er-Dog-An the terrorist finally got what he deserved. Syria lies in ruins because of this bastard. 20,000 Iranians are dead because of his ISIS bullshit in Syria and Iraq, and his Uighur games in Xinjiang have cost China enough troubles. Neither Iran nor Russia or China should forgive him. He should be hanged, just like Saddam. How can anyone justify bailing out a convicted terrorist?
Economic crisis in Turkish economy generally shows us there has been a clear mixture of political and economic pressure behalf of USA. However, the new world and financial order do not approve using economic weapons against any country unless there is nuclear or vital threat for world peace. Turkey has obt to make a multi-directional corporations with Russia, China, Iran and other Asian and African countries depends on her geopolitical position. This is most natural right of Turkey indeed, but the purchase of S-300 air defence system from Russia, close affairs with Iran, Middle Eastern policies and BRICS expansion have threatened US’s interests over these continent.
What to do next is, Turkey ought to take the necessary stable precautions for her economy and appease hostility with Washington and renew foreign and financial strategies in the context of Eurasian Economic Union, Shanghai Economic Cooperation and BRICS as well. For a better or worse, Turkey has been a NATO ally and unique aim is establish perpetual peace around her region and within the boundaries.
Interesting exposition of the basic situation.
However, the basic issue is not addressed in your answer. You give clues as to the potential benefit for China of buying Turkey on the cheap.
But what about the costs? Turkey seems to be in freefall with, as you say, Erdogan being more and more erratic. If China buys Turkey, it also buys Erdogan with it and a money sink. This is classic problem of imperialism and China has a similar problem with Venezuela.
Could China say no to Erdogan?
Yeah….he will get real investment and real development instead of the debt fuelled ponzi scheme that the "west" (aka the Cabal) is offering
Turning to China for help would be only the last mistake by Mr Erdogan. Turkey will soon learn what the cost of the help will be.
Pakistan economy has been destroyed by corruption, mis-management, and Pakistan help to the US “war on terror”. Pakistan’s new Prime Minister Imran Kahn has plenty of challenges ahead. I am optimistic and hope Imran Kahn will make will have success with the help of the Pakistan military.
The US is doing their utmost to crush Pakistan, Turkey, Iran, Venezuela, Russia, and China through economic war. The victims must help each other an increase trade and investments.
Prime Minister Imran Kahn should immediately stop the US supply lines through Pakistan, then the Afghan war soon will be over, and we get less terrorism and more stability enabling foreign investments and loans.
Turkey should leave NATO. As soon as the US is out of Syria, the return of refugees will start. Rebuilding will create growth in the economies of the countries that helped Syria. I think EU, Russia, and China will provide aid and loans.
Correct ken. The Collins sub’s are shit. Billions spent on nothing.
Economic benefits are one thing, but it seems to me that China has to use this new influence to keep Turkey from supporting Uighur independence. I think Mr. Xi looks a bit less than thrilled: he may think that they have to take this opportunity, but may also know that Mr. Erdogan may not be able to stop supporting Uighur restiveness.
Trump and by extension Israeli likud party is doing a fantastic job destroying Americas influence and hegemony. Loosing Turkey would be a huge disaster after loss of Iran in the late 70s. China can now checkmark US in Middle East by having all the puzzles lined up for their road and belt initiative. With Iran and Turkey, they have the two most geopolitical countries in the World under their influence. NATO without Turkey is useless. Great job China.
Trump is mad, using tariffs for political blackmail breaking all WTO rules. Rubbing salt into the wound, Trump raises tariffs against Turkey for the sake of one US individual.
To the extent that this will benefit Russia and China, then this is good.
Trump’s "America First ", has now been exposed. Everything for US and nothing for the rest of the world. My way or the highway. Trump is just one of the long line of destructive US presidents.
On a related issue. By encouraging BREXIT, Trump pushes for the breakup of the EU. As a result, the Brits face an uncertain economic future, and the pound is falling. But has the US unveiled aid initiatives for the Brits ? Zilt, nyet. To the US, the " special relationship " means the Brits remain followers of the US. Special in words only.
Very soon you will start hearing of Turkey falling into China’s debt traps. Its all China’s fault to lend a helping hand to Turkey in its time of gread distress and needs. LOL.
Turkey is a key nexus into Western Europe, and through the Midddle East the Continent of Africa.
Although Russia supplies that natural gas, they are also helping Turkey eliminate the need with a 4-reactor nuclear power station, funded by Russia … It’s not only China that is bailing out Turkey.
If the Professor is correct then it is a smart move for the Middle Kingdom——they already control the port in Athens——–Turkey sits in the middle——-Mr Goldman knows in real estate it is location,location,location———and Turkey is prime real estate for the Middle Kingdom!!
When the Turkish Lira devalues or depreciates, Turkish export products becomes more competitive in the World market. this means that Turkey will be able to increase its exports and collect more foreign exchange. This means that Turkey will turn its present current account deficit into a current account surplus. it will be able to repay back whatever loans it has contracted from foreign sources. Furtherfore, its GDP will increase more rapidly, and its economy will become stronger. It is a good thing when the currency of a country depreciates and it is a bad thing when the currency of a country appreciates. I can see prosperity for Turkey in the depreciation of the Turkish Lira and a declining economy for the USA in the appreciation of the US dollar. Remember, the Russian Ruble depreciated sharply in 2014. Though the Russian economy shrank in 2014 and 2015, it bounced back in 2016 and now it is accelerating.
Being a satrapy of China is for Turkey better than being in serfdom to the US. Besides, a weakened lira will lower the Turkish people’s standard of living, but will do a lot to balance trade, thus strengthening the economy on the longer term. A current account deficit of around 5% of GDP is not sustainable, so better suffer the shock of devaluation. But Turkey should also strive to develop renewable sources of energy, to reduce the present 74% dependency on imported oil and natural gas.
China does look more stable partner then US witht lunatic Trump. Any country with a brain should make serious strategic plans to move away from US dominted financial institutions and diversify its dependencies. Right now US is dissruptor of trade and economical stabilty on global stage. Not someone that you can trust or call partner.
Hmm… .6 to 1 would make a Turkish vacation or retirement…… Cheap….
Hmm…… Flashboys 3.0…."Sofia frontrunning "…
Corporate Capitalist Westerners, especially with names like "Goldman", only think of money – buy, sell.
They are hardwire programmed to measure everything is $. They have stopped having babies because the Present Value of a newborn baby is not positive.
By Goldman’s measures, Xi’s BRI too has a negative PV. But BRI is more than that, in Xi’s own words:
https://www.youtube.com/watch?v=hNKTbMx8PFk
With 4,000 years of history of being hounded the Goldmans can be excused of being cynical. They can not fathom that Dialogue of Civilizations and World Peace can not be reduced to a $. Turkey, Pakistan, Iran, Russia all see their future in trade, because people who trade do not fight.
If Turkey is really on sale as Goldman suggests, then why his types not taking advantage of it? Hey Goldman, a great opportunity for you. Go for it.
Countries around the world will increasingly turn to China for financial assistance without all the strings, political and economic, attached to IMF loans. Pakistan is negotiating with the IMF for a $12 bailout. If the IMF attaches onerous conditions, perhaps China will step in.