The Turkish Turmoil – ‘What caused the Lira to collapse?’


Yet another country to be facing financial and political gloom.

After the grim fate that rich nations like Greece and Venezuela met with, Turkey is yet another emerging market economy on the list which happens to be on the cusp of something similar. People blaming the recent US sanctions on Turkey for its economic outbreak may have to think twice. It may have acted as a catalyst, but there are many other reasons to ponder upon.

What happened? How did it happen? What may happen? Let’s get started!


Turkish currency ‘lira’ gained spotlight when it started slumping at the beginning of this year. This rattled the markets worldwide.

The major issue started with the Trump administration putting a series of sanctions against Turkey in retaliation for its refusal to release Andrew Brunson. Brunson is an American pastor detained by Turkish authorities for his alleged involvement in 2016’s failed coup against President Erdogan. Those sanctions include the announcement of the doubling of tariffs on metal imports into the US from Turkey. The increase in tariffs made imports from Turkey costlier for the buyers in US, due to which shifted to imports from other countries or from the domestic market, this resulted in a huge depression in metal industry in Turkey. This was the initial catalyst for causing negative ripples in financial markets over the past few weeks and also disturbed the balance of trade of Turkey.


Turkey’s high growth over the past few years has been attributed to the dollar-dominated credit it acquired, which has heated up the economy and widened both its fiscal and current account deficit.

Its fragile financial system has heightened the risk of a downside funding scenario. Recently, the rating agency Moody downgraded 20 Turkish financial institutions saying that they depend heavily on foreign funding. This has deteriorated investor sentiment, which will further limit access to market funding. If these sources of money continue to dry-up, Turkey won’t be left with enough reserves to provide a cushion to the Turkish Lira.

Moreover, much of the foreign currency in Turkey is held by banks, which could be withdrawn by nervous customers. If that happens, the country may not be able to buy up its currency to prevent it from spiraling further.

Having battled hyperinflation 15 years ago, the ghost can be back if Turkey ever starts printing money again.  It is already fighting a double-digits inflation which went to a peak of 12.98% last November.

Once one of the fastest growing currencies, Lira, has now depreciated 34% of its value against the dollar. Stock market has fallen 17% and government borrowing costs have risen to 18% a year.

The collapse of Lira has caused chaos in the emerging market space. Investors, fearing that other emerging economies could follow in Turkey’s footsteps, have pulled their money out of countries such as India, Argentina, South Africa and Indonesia. Thus affecting the rupee, peso, rand and the rupiah respectively.


Policymakers and investors around the world are worried about government intervention in monetary policy and Central Bank independence. There has been growing concern around President Recep Tayyip Erdogan’s economic policy. He has been criticized for keeping the rate of interest low for a long time even though inflation is thrice the central bank’s target.

Without raising the interest rates and tightening the monetary policy, Turkey is left with few options to get out of the mess. The Central Bank of Turkey has finally understood this and in order to protect the bank accounts from drying up and bringing the economy to equilibrium, the Turkish government has been continuously increasing the interest rates in Turkey for quite some time now (increased interest rates attract deposits and discourage borrowing and consumption). But the situation is still not in control.


If the situation worsens, the country could have to be bailed out by the IMF. Sane move would be to further hike interest rate to curb the inflation (which the government is not ready to do). Turkey should also take this as an opportunity to improve ties and forge stronger relations with the European Union.


A decade of unconventional monetary policy has stored up immense vulnerabilities in the land of Turkish Delights. The toxic mix of geo-political stress, delusional political power game and deteriorating economic fundamentals have made Turkey weak over time. There are many countries who have gone bankrupt but lived to tell the tale. We can only hope that Turkey does not slide down upto that point.

Uptill now, the future of Lira and Turkey still remains uncertain!

Inputs: The Economic Times,