Turkey is spiraling into deep economic crisis as foreign exchange reserves collapse and capital overwhelms the Erdogan administration, the international business editor of the Daily Telegraph, Ambrose Evans-Pritchard warns.
Pritchard explained in his Daily Telegraph article that The Central Bank of the Republic of Turkey (CBRT) drove the overnight offshore swap rate above 1,300 percent to secure the Lira, ahead of national elections on Sunday, affirming that such interference will have extremely negative consequences over the longer term.
“The weak lira is causing a ferocious squeeze for banks and companies that pushed Turkey’s external liabilities to $234bn (£179bn) during the boom years, when dollar liquidity was cheap and abundant,’’ Pritchard explained the financial situation of Turkey, adding that Turkey has to pay roughly $150bn of this is short-term debt or refinanced within 12 months.
Despite CBRT’s interference in London swap market to prop up Turkish currency, the Lira has continued to lose its values as far as 5.6750 against the dollar on Friday.
CBRT’s net reserves have shriveled to $26bn, leaving a dangerous mismatch that is now being tested by markets, Daily Telegraph writes.
William Jackson from Capital Economics earlier warned that Turkey has the thinnest reserve cover in the emerging market universe and the ratio of short-term foreign debt to net reserves is at untenable levels near 500 percent.
Daily Telegraph article mentioned that Turkish banks face a high amount of repayments in April, May, June and the cost of market refinancing has risen by 200 basis points over the last week alone. “It may prove prohibitively expensive for some banks to roll over their debts,” the newspaper quotes Jackson as saying .
Pritchard estimates that Turkish banks might face a credit crunch as the banks will have to sell foreign currency assets and shrink their balance sheets.
Meanwhile, Italian global banking and financial services company, UniCredit forecasts “Economic contraction of 5 percent this year, precipitating a geopolitical crisis and ultimately a rescue by the International Monetary Fund. Credit default swaps measuring bankruptcy risk for Turkish state debt have spiked 150 basis points to 454 over the last week.”
The Daily Telegraph article refers that Turkey’s “self-contained crisis” has spread to the most vulnerable tier of emerging markets (EM), regardless of geography as the Argentine peso, the Brazilian real, and South African rand have all weakened in sympathy.
The article mentions that Turkish citizens themselves are scrambling for dollars, as the Lira has lost 40 percent of its values and Ankara’s crude actions in the swap markets have made it hard for international companies to hedge investments in Turkey.