The dollar/lira currency pair climbed over the TRY 5.00 mark for the first time yesterday evening – and remained on this trajectory this morning. The lira currently continues to mark new record lows against the common European currency, too. Since the start of the year, the Turkish currency has depreciated by more than 22% against the euro and by as much as 25% against the greenback. The Argentinian peso was the only other noteworthy currency to underperform even more.
The lack of resolve by the Turkish central bank and the related, legitimate doubts about its political independence remain the key reason behind the weakness of the Turkish currency. However, the latest slump was due to the escalation of the diplomatic differences that prevail between Turkey and the US. The US administration is demanding the immediate release of the US pastor Andrew Brunson and yesterday imposed sanctions against two Turkish ministers who are alleged to have played a leading role in his detention. Turkey described the US sanctions as an “aggressive” act and has threatened countermeasures. The Turkish government repeatedly stresses the independence of its own judiciary and refuses to tolerate any involvement in internal matters. The fact that President Erdogan brought into play an exchange between Brunson and the US-based cleric Gülen does not seem contradictory to the Turkish government.
The sanctions brought by the US against the ministers have clearly had limited consequences to date for the Turkish economy. The assets held by the two government ministers in the US will be frozen and US companies are prohibited from conducting business with them. Nonetheless, the reaction on the foreign exchange market is understandable. After all, both sides seem reluctant to compromise, with further sanctions potentially on the cards. Measures in particular that restrict access to international financial markets could cause problems for Turkey, as the country relies on international lenders owing to its structural current account deficit. Its current external debt is largely financed on a short-term basis and therefore susceptible to a swift withdrawal of capital. Should this occur, a further “simple” devaluation of the lira will not be the only outcome. Rather, the risk of a balance of payments crisis will increase, so that Turkey will have to impose capital controls and far-reaching defaults of exposures on the Bosporus would no longer be ruled out.