May 09 2019

Erdoğan shows how to mismanage a currency crisis: ex-IMF official

A former International Monetary Fund official is joining a chorus of economists, analysts and ratings agencies in calling on Turkish President Recep Tayyip Erdoğan to urgently deal with Turkey's economic problems.

Erdoğan is giving other political leaders a lesson in how to mismanage a currency crisis, said Desmond Lachman, an ex-deputy director at the IMF's headquarters in Washington D.C.

The lira is slumping against foreign currencies due to a loss of domestic and international confidence in the Turkish government’s policies, Lachman, now a resident fellow at the American Enterprise Institute, said in an opinion piece for the Hill late on Wednesday.

Emerging markets and the Spanish banking system should brace themselves for the impact of debt defaults in Turkey should Erdoğan fail to deal with the instability, Lachman said.

“One has to hope that President Erdoğan soon recognises that, once lost, investor confidence is difficult to restore,” he said. “That might induce him to do something radical like call in the International Monetary Fund for help or fire his minister of finance to show that he has become serious about breaking the downward economic spiral.”

Turkey is faced with a mountain of troubled corporate debt that is squeezing banks’ balance sheets and that, along with the lira’s declines, is eroding their capital. The lira has slid almost 15 percent against the dollar this year, adding to losses of 28 percent in 2018, when a currency crisis peaked.

ABN Amro said in a report on Wednesday that the dust had yet to settle on the currency crisis, which threatened to balloon into a full-blown financial meltdown last August. Now Turkey and its companies, struggling with economic recession and inflation of almost 20 percent, are facing as much as $180 billion of foreign debt repayments over the next year.

“That Turkey is in the grips of a vicious currency crisis can be in little doubt,” Lachman said. “Indeed, after Argentina, the country has the dubious distinction of having the world’s second-worst performing currency.”

Erdoğan, chasing economic growth, has relied on the central bank to desist from raising interest rates to stem the lira’s slide and to deal with inflation. He has also replaced experienced economic officials with loyalists, including Berat Albayrak, his own son-in-law, who has headed a now-merged Treasury and Finance Ministry since July.

The Turkish president has also overturned the result of an election for the mayor of Istanbul, won by an opposition candidate, and has almost ruined relations with the United States by ordering air defence missiles from Russia.

“It's regrettable that President Erdoğan is showing no sign of urgency in addressing the currency crisis and is in fact adding to political uncertainty,” Lachman said.

“A weakening currency could very well lead to corporate bankruptcies that further erode investor confidence that leads to a further currency weakness. That in turn could add to further political instability, which would be yet another factor contributing to currency weakness and to a draining of investor confidence.”

The lira dropped 0.4 percent to 6.20 per dollar at 11:20 a.m. in Istanbul on Thursday, threatening a key technical resistance level cited by traders, as investors fretted over the prospect of fresh elections, slated for June 23, and the central bank’s dwindling reserves of foreign currency.