The Turkish lira took a nosedive on Friday as Turkish President Recep Tayyip Erdogan decisively lost the first battle in his “economic war” against the United States.
Erodgan was obliged to hold emergency meetings, give bizarre Islamist speeches to rally the Turkish people, and plead with Russia for help within hours of President Donald Trump announcing harsh tariffs on Turkish steel and aluminum.
The Wall Street Journal saw good reason for Erdogan to be nervous and quoted analysts who said he only has himself to blame:
The lira was down almost 16% against the U.S. dollar on the day in European afternoon trading and 47% in the past 52 weeks—the second-biggest decline for a Group of 20 currency over the past decade, after the Russian ruble’s drop in 2014. The lira is down 23% this week alone.
Turkish sovereign bonds also sold off, with yields on 10-year debt trading at above 20%, compared with 19% Thursday and roughly 12% at the start of May.
“First you put sanctions on it and then, when the currency weakens you accuse them of currency manipulation and double tariffs on them,” said Jan Dehn, head of research at emerging-market house Ashmore Group. “Erdogan has single-handedly inflicted harm to Turkey to the point of extreme vulnerability, but this is the straw that breaks the camel’s back.”
The Journal observed that Erdogan’s efforts to rally Turks for a sustained economic war against the United States only made things worse:
Even though the Turkish currency recouped some of its earlier losses on Friday, it dropped again after Mr. Erdogan addressed a crowd of supporters, asking Turks to exchange “any dollars, any euros or gold” for the domestic currency in order to shore up the lira. “Hopefully we will overcome this disaster and we will also successfully overcome this economic war,” he said.
“If they have their dollars, but we have our people, our righteousness, and our God,” Mr. Erdogan had said a day earlier.
For money managers, this was a sign that the Turkish government is unlikely to announce the measures needed to assuage markets, such as allowing the central bank to raise interest rates sharply or asking for an International Monetary Fund bailout.
CNBC quoted Erdogan telling a crowd of supporters on Thursday: “There are various campaigns being carried out. Don’t heed them. Don’t forget, if they have their dollars, we have our people, our God. We are working hard. Look at what we were 16 years ago and look at us now.”
The Turkish president’s remarks on Friday were even more pugnacious:
“Change the euros, the dollars and the gold that you are keeping beneath your pillows into lira at our banks. This is a domestic and national struggle,” Erdogan said, according to an Associated Press translation.
Erdogan said Turkey was facing an “economic war” and noted the country would respond to those countries who had started it.
“We are facing economic attacks today, and we need to defend our country,” Erdogan said, according to a translation. “The economic attack against us now is the same as the coup attempt against us. I’m urging our country to increase outputs, to increase exports.”
CNBC noted Turkish stocks were down almost 15 percent on Friday, an especially sharp blow to the Turkish market given the 42 percent slump in 2018 to date.
Erdogan held an urgent phone conference with Russian President Vladimir Putin on Friday to discuss economic ties and joint Turkey-Russia energy projects, as well as the latest developments in Syria.
Turkey’s Daily Sabah reported on Friday that Foreign Minister Mevlut Cavusoglu is scheduled to meet with his Russian counterpart Sergey Lavrov in Ankara next week. Among the topics of conversation will be economic ties and Turkey’s purchase of Russian surface-to-air missiles, a move that irked the United States and NATO.
The new U.S. sanctions on Turkey are intended to pressure Erdogan to release American pastor Andrew Brunson, who the Turkish leader has offered to trade for the extradition of expatriate imam Fethullah Gulen, regarded by Turkey as a major terrorist threat and the architect of the failed 2016 coup attempt against his former friend Erdogan.
Erdogan was stung by accusations that his offer essentially means he is holding Brunson hostage – an accusation President Trump repeated in the bluntest possible terms last month, along with a threat to “impose large sanctions” if Brunson was not released.
Trump announced tariffs on Turkish steel and aluminum on Friday via Twitter. “Our relations with Turkey are not good at this time!” he said.
I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!
— Donald J. Trump (@realDonaldTrump) August 10, 2018
Erdogan responded that “no one can push the Turkish people to take a step with fines, threats, or sanctions.”
“Solving this problem is only possible through calm negotiations and diplomacy,” he said.
A high-level delegation from Turkey visited Washington this week to discuss Brunson’s case, but there were no breakthroughs. Hopes for Brunson’s release were raised in July when he was moved from prison to house arrest, but Turkey’s subsequent refusal to release him as expected galvanized both the administration and Congress into action. Even before President Trump’s tariff announcement on Friday, sanctions were placed on two of Erdogan’s ministers for human rights abuses and Congress moved to block the sale of advanced F-35 fighter jets to Turkey.
The White House stated on Friday that tariffs would be imposed against Turkey under Section 232, which covers exports that “threaten to impair national security.” The White House insisted the action against Turkey will be taken “independent of negotiations on trade or any other matter.”
Until now, Erdogan’s political strength has been drawn in part from a booming economy, but in 2018 Turkey’s heavy reliance on foreign investment caught up with it. Foreign investors proved to be much less confident in Erdogan’s economic leadership than much of the Turkish electorate, finding his paranoia, strident nationalism, growing distance from European values, and Islamist rhetoric less than reassuring.
Foreign investors also were not pleased when he decided to name his brother-in-law Berat Allbayrak as finance minister. Albayrak’s promise to introduce a “new economic model” was not greeted with much enthusiasm by skeptical international investment houses. Albayrak struggled to reassure them on Friday by promising the new model would respect “all national and international stakeholders” and protect Turkey’s Central Bank from political interference.
Critics of the Trump administration’s tough approach to Turkey worry that Erdogan will be driven out of NATO and into Russia’s orbit, although many believe that process is already underway, given Turkey’s failure to join the European Union and Erdogan’s lingering hard feelings for European leaders for what he sees as interference in Turkish politics. If Erdogan is determined to become a Putin-style despot, it would be difficult to keep him from developing closer relations with the prototype.
There are also concerns the feud between America and Turkey will damage the already jittery European market, particularly given its existing apprehensions about U.S. economic conflicts with China and Iran. For that matter, the fall of the lira on Friday was not without negative effects on American stocks.