August 10, 2018 / 10:30 AM / 10 months ago

Breakingviews - Turkey fated to pick worst of its bad options

Turkey's Prime Minister Tayyip Erdogan addresses his supporters during a Mother's Day event

LONDON (Reuters Breakingviews) - After digging itself into a crisis, Turkey will probably find the worst way out. The lira’s alarming slide is fanning concern that the country will struggle to meet external financing needs. President Tayyip Erdogan may soon have to choose between imposing capital controls and seeking help from the International Monetary Fund. Defiant self-sufficiency is more his style.

The lira’s slide accelerated on Friday, with the currency slumping more than 10 percent against the dollar at one point. Tensions between the United States and Turkey were already weighing on the lira earlier in the week. The bigger problem is that investors have little confidence in how the economy is being managed, having lost faith in the central bank’s willingness to tighten policy by enough to curb inflation.

Until now, the worst side-effects of the lira’s decline were higher inflation, rising borrowing costs, and a gradual erosion of the health of Turkish banks. The currency’s latest dramatic drop may, however, mark a tipping point by raising concerns about how easily external debt will be rolled over. Roughly half of Turkish banks’ FX wholesale refinancing needs are short term and due within 12 months, Moody’s estimates. For the economy as a whole, short-term external debt was 21 percent of GDP in 2017, IMF data shows.

Tinkering with economic policy won’t wash. And only chunky rate hikes will convince investors the central bank is free from political influence. Nor is massive intervention in the currency markets a sustainable option given official reserves did not offer a big enough buffer against big external shocks, according to an IMF report published in April – even before the lira’s slide gathered momentum.

Erdogan effectively has two options. One is to seek help from the IMF, like Argentina earlier this year. That would have strings attached, and Erdogan won’t bow to external policy prescriptions. The alternative is capital controls. The measure is not one to be taken lightly but can give a country the breathing space it needs to put its house in order. It’s of less use if the right policies aren’t enacted. Erdogan has repeatedly made bad economic choices. There’s no reason to expect a change now.   


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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