Photo: NurPhoto via AFP/Alain Pitton
In 2018, Turkey faced one of the worst currency and debt crises in its history. Photo: NurPhoto via AFP/Alain Pitton

Turkey’s crisis fell out of a clear blue sky, or so it seemed to analysts who weren’t looking up. In fact, Turkey was the financial crisis longest in preparation of any in recent memory.

The Erdogan model reduces to massive foreign borrowing to feed domestic consumption. Turkey got away with the worst current account deficit of any economy of significance because Erdogan sold his neighbors and the Americans on the notion that he was strategically indispensable. Eventually the market wearied of buying Turkish paper and the Gulf States decided that bailing out Turkey wasn’t worth the cost.

Most emerging markets don’t need to borrow money. In fact, most (including Russia, China, Hungary and most of the Asian emerging markets) are net lenders: They sell more goods and services than they buy, and lend the rest back to the deficit countries.

Brazil, the largest Latin American economy, has a tiny current account deficit. It has many problems, but it doesn’t have to worry about a creditors panic. Argentina has a big deficit, and it’s no surprise that Argentina’s peso was the second-worst-performing emerging market currency after the Turkish lira.

Current account deficit

There isn’t any Turkish contagion, rather, investors are taking each market on its own merit. The Turkish crisis hasn’t led to contagion, that is, highly correlated returns among emerging markets. On the contrary, it has led to the greatest dispersion of returns among emerging market ETF’s since the Turkey ETF began trading in 2012.

Standard deviation of EM daily returns

The chart shows the daily standard deviation of returns across the universe of emerging market ETF’s. The higher the number, the greater the dispersion (and the lower the “contagion”).

Turkey is a unique basket case, a throwback to the Latin American kleptocracies that went bankrupt in the early 1980s. Turkey’s US$220 billion in corporate foreign debt is an annoyance to some creditors who may not be repaid, but it isn’t big enough to shake the system.