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.
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.
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.
Hmm… .6 to 1 would make a Turkish vacation or retirement…… Cheap….
Hmm…… Flashboys 3.0…."Sofia frontrunning "…
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.
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.
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.
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!!
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.
Turkey is a key nexus into Western Europe, and through the Midddle East the Continent of Africa.
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.
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.
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.
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.
Correct ken. The Collins sub’s are shit. Billions spent on nothing.
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.
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.
Yeah….he will get real investment and real development instead of the debt fuelled ponzi scheme that the "west" (aka the Cabal) is offering
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?
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.
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?
As China grows her economic hegemony, I wonder: What will happen when some charming little country figures (fairly or not) that China acquired big-ticket infrastructure items by extortion, and decides to nationalize said items.
"Without all the strings". Tell that to Sri Lanka.
Pope Paul the 12th?
Spengler writes better and more objectively when the subject is not Israel.
While I agree with Goldman’s broad thesis, when analyzing an emerging market, I would advise against using the local stock exchange as a barometer of economic health. Without beating the point to death, capital markets and shareholder rights in developing countries are very limited.
The local view is that anyone dumb enough to put their money there deserves whatever abuse they get.
If you are friends with Israel then like saudi Arabia you don’t need to worry about anything. Canada is now saying ‘We don’t have a single friend’: Canada’s Saudi spat reveals country is alone.
Mr. Goldman which is better? A strongman that only sells you military equipment at exorbitant prices with money you have to borrow at exorbitant rates from the IMF and World Bank, or a country that actually invests in infrastructure development, business and the over all well being of your people. Looks to me like Erdogan has already made his choice. Who is the better owner, a predatory US, looking to strip your country of everything of value and turn you into a third world country, or a country that is going to help you over come your present economic difficulties and improve you overall standing in the world, by turning your economy around ? The only thing the US would offer is a loan from the IMF or World bank, with restrictions that would further cripple Turkey`s economy, while working at regeime change and charging usurious rates of interest to thet country. i am sure Erdogan is familiar with Greese`s experience with the IMF:
Trump is turning yet one more allie into a sworn enemy. The arrogance, the taking this opportunity when Turkey`s economy is weak to jump in and land the killing blow. What can one say about a country that would do that to it`s friends. And that after backing and financing a coup to over throw the legitimate government of Turkey. Is there any wonder that Erdogan is choosing Russia and China? Friends like the USA are friends that anybody is better off without.
" 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."
In one sentence, goldman had described eloquently the poison that empire and london shylocks used to engineer countries like turkey, greece, italy, spain, portugal,etc,etc into the clutches of the banksters. The catchword here is "massive foreign borrowing". Without the "massive foreign borrowing" there would be no "Third World kleptocracies".
Greece succumbed to the TRIAD and is suffering now. Its lucrative and profitable public sector is slowly but surely being swallowed up by the shylocks. Erdogan had seen the writings on the wall and he chosed a different path. Because of this, turkey is described as a "satrapy of china". But one never hears goldman describe Greece as a "satrapy of the Triad". LOL!
Michael Walsh
Have you read the 2017 annual reports from the Sri Lankan Central Bank and the Ministry of Finance?
May I suggest you read it first before you shoot off your mouth.
"If Turkey is really on sale as Goldman suggests, then why his types not taking advantage of it?"
Simple: because he who wanders with his raised hand for somebody to please give him some cash has at least a choice of whom to sell to.
Turkey’s Erdogan prefers to sell his country to China rather than to the US or EU.
"Turkey is a key nexus into Western Europe"
Yes. That is, as long as the economic relationship between Turkey and Europe remains what it is.
Politically, Erdogan is doing everything he can to make Europeans loathe his country. Many of us can tell the difference between a leader and a country, but I can’t guarantee this will forever be sufficient to prevent Erdogan from succeeding.
"By encouraging BREXIT, Trump pushes for the breakup of the EU."
When the British decided to exit the EU, the US president was Obama.
Trump had zero influence in that British referendum.
If Turkey do not want American to destroy the economy.Turkey have to rely on China.
Alexis Toulet
Explanation is simpler.
1. Turkey is not for sale.
2. If it is, neither US nor EU have money.
3. If they do, they have no confidence in Turkey.
China has money and has confidence in Turkey, that is why Turkey may sell to it if it wants to.
I actually bitterly smile when I read this news. You know why? Because in my country, Indonesia, there are groups of fanatics extremist religion people that actually think this president is their most ideal leader and they hope this guy is their president and always mock their own president.
Not only that, those groups of people are also always voice anti-foreigner, especially China whom they call Aseng stereotypely, for the fear this foreigner will take control of the country and always accuse the current Government is being the subject of this foreigner.
Now I wonder how are their reactions when they see this ideal president of theirs actually ruin Turki’s economy and ask help from China whom they detested
dude, you must take a nobel price in economics! Currency collapse is the road to prosperity!! I hope you don’t have a degree on economics, otherwise your university’s reputation will fall…faster than the turkish lira!
Syed Abbas
Your N°3 does seem right.
Once a slave, always a slave. Erdogan is a terrorist, get out of the naive ideology brought into you by Western media. One man terrorist is another man freedom fighter and in the eyes of most of the Turkish people erdogan is a hero and that should be enough. What about bush and Blair who killed millions in Iraq and Afghanistan . Why they should not be hanged.
Iordanis Kyzeridis The problem is Turkish president thinks the same as Michael. Michael, Turkey needs to import first to export. The only thing that helps to the production costs is the salaries, which can’t be hold long time due to potential high inflation. Turkey has no gas or oil like Russia, so you can’t compare.
What the author fails to disclose is the fact that most companies listed on BIST100 are not publicly owned companies. In fact, many of these companies have about 10 to 20 % of their shares publicly traded. Therefore, it is practically impossible to own a company by buying 10% of its shares, not to mention the real cost of such an acquisition will be much higher as share prices will instantly climb to astronomical values once the intend of the acquisitioner is known by the public.
Iordanis Kyzeridis Mr. Kyzeridis are you the one who saved Greece from bankruptcy?
"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."
In other words, Turkey already was a "satrapy" of the USA/EU.
I don’t remember, specially during 2004-2007, anybody in the West complaining about Erdogan. On the contrary, he was the center-right-wing big hope in the Middle East, Merkel’s go-to guy in the region.
Problem is, nobody noticed he was a fanatic islamist.
I am counting on your logic to see Venezuela and Zimbabwe become global super powers in my life time.
What other viable options does Turkey have?
Batuhan Makara
You’re making an error, I am not Recep Tayyip Erdogan.
u such an idiot
dont listen or read this idiots article. he has no clue of the deep dimensiond of Turkey
whole of the Istanbul 100 equity index’s price must be more than USD$ 100 billion, please recheck that.
Selim Yalvac Mr Yalvac, you have all my sympathy for the disaster of your homeland. Here is a piece of advice: be careful what you vote for!
…by the way, I’n not an expert, but is China finacialy so strong/healthy?
Idiot Erdogan and his cronies built infrastructure and their crazy projects with borrow money, meanwhile selling all thee cash cows in the country to foreign investors. How the hell did anyone think that debt could be paid back?! There is nothing that makes money in the country anymore. One wrong policy after another, they depleted all their financial resources.