OK, Tell Me More?
Last week, the Turkish currency fell to its lowest level ever following a tweet by US President Trump detailing how the country is set to double tariffs on Turkish imports.
Hmm, Go On?
This comes at a tough time for the Turkish president who is being widely criticised for implementing unfriendly business policies in the country. He later responded to Trump saying that he intends to push back on US tariffs imposed on Turkey. As these could be the makings for another trade war, the markets were even more spooked upon the response. However, this isn’t the only reason the currency is plummeting.
What’s Wrong With Turkey?
Well, it turns out that the Turkish economy isn’t doing too great. The government has amassed a pile of debt, with large amounts being foreign-debt. With the Lira’s value falling, this means debt repayments are getting more expensive by the day.
For people living in Turkey, this directly means increased prices of goods with some items quickly becoming unaffordable due to the accelerated inflation in the country.
The president has also been accused of turning the country into an autocracy – meaning a government where one person has absolute power. In fact, about a month ago, he appointed his son-in-law as the country’s finance minister. This was a move that showed just how tight his grip is on the country – any of this sound familiar?
Can They Issue More Debt?
Perhaps even more troubling is the major concern among investors that the country won’t be able to pay back all the debt it’s racked up. When a government needs to raise money, one option is typically to raise government debt by issuing government bonds.
With so much instability, government bond yields (think interest rates) have shot through the roof to compensate investors for the risk. As uncertainty increases in Turkey, yields also increase and so does the cost of servicing existing government debt. It’s a downward spiral that many developing nations have found themselves trapped in at one point or another – let’s hope Turkey finds a way out.