Thursday, August 16, 2018

Turkey is Harvesting the Risks of Its Foreign Denominated Debt

Noah Smith has hit the nail on the head when he writes that Turkey's currency crisis is the direct result, as many emerging nations have experienced, of issuing debt denominated in foreign currencies rather than its own currency.

It is just bad economics for any nation to issue debt in a foreign currency.  I wrote about this in relation to Argentina in 2010 and Argentina still, today, has the problems associated with foreign

denominated debt.

It comes as no surprise that Turkey is enduring a currency crisis as it has been evident for some time that a currency or debt crisis could blossom and potentially mushroom into contagion in places like Turkey, Argentina, and Italy to name a few, because the IMF only provides assistance with conditions which usually transcend desired stability to economically self-defeating austerity.

Europe has 4 eurozone banks and one UK bank with large exposure to Turkey.  Considering the eurozone countries all have debt denominated in a non-fiat currency called the euro, which has the same economic risks as any foreign denominated debt and which the ECB can only protect as long as Gemany permits it as I have written numerous times in a long list of articles.

For now, Qatar has promised 15 billion US dollars, which is only a small fraction of Turkey's currency risk in foreign denominated debt, for "investment" in Turkey's banks to provide some financial financial buffer in their increasingly limited ability to effectively function, while the Central Bank of Turkey has taken only limited actions and over night lending backdoor liquidity despite the widely acknowledge need to raise interest rates (which Erdogan opposes --- raising questions of the Central Bank of Turkey's independence) to re-establish stability.

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