Bob Cunneen, Senior Economist and Portfolio Specialist
Turkey’s currency vs bond yield
Turkey’s financial markets have taken a big bath this year. The Turkish lira has collapsed by 34% against the US dollar this year with the currency now at 5.84 to each US dollar (blue line). Turkish 5 year government bond yields now yield 24% compared to only 12% at the start of 2018 (red line).
Turkey’s financial waters have been warming up for a considerable period. Inflation has been rising and now stands above 15%. Turkey is running a large current account deficit at -6 % of Nominal Gross Domestic product (GDP) that requires supportive capital inflows to finance. Turkey also has significant foreign debt at approximately 53% of GDP.
Turkey is a potential risk to global markets both financially and politically. Turkey is critically important given its proximity to Syria and as a member of Europe’s NATO defence organisation. The financial linkages are even more problematic for Europe. European banks have significant investments and loans in Turkey. The Bank for International Settlements estimates that Spanish, French and Italian bank assets in Turkey were approximately US$138 billion at the end of 2017. So European financial shares are proving acutely sensitive to Turkey’s current turbulence.
A key lesson of the Asian Crisis in 1997-98 with Thailand, and the Global Financial Crisis of 2007-09 with US subprime mortgage securities is that even when small components of the global economy break down, they can have dramatic consequences. The potential contagion risk from Turkey to global markets bears watching by investors.
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