Erdogan tells Turks to buy crumbling lira as Trump turns the screws

An investor looks at an electronic board showing stock information at a brokerage house in Shanghai China. Aly Song Reuters  File

An investor looks at an electronic board showing stock information at a brokerage house in Shanghai China. Aly Song Reuters File

Trump said the tariffs on aluminum imports would be increased to 20 per cent and those on steel to 50 per cent as the Turkish Lira "slides rapidly downward against our very strong Dollar!"

The day saw the lira plunge as much as 18% at one point, the biggest one-day drop since Turkey's 2001 financial crisis.

Data from the Bank of International Settlements indicate that banks' exposure to Turkey is about $82 billion in the case of Spain and $17 billion for Italy, relatively minor figures given that top euro zone banks have combined total assets of more than 20 trillion euros.

The value of the Turkish Lira has fallen by 2/3 since the start of the year. The future contract for the Dow Jones industrial average was down 0.4 per cent and the contract for the S&P 500 lost 0.5 per cent.

Turkish President Recep Tayyip Erdogan said Turks should not be alarmed by exchange rate movements.

On Friday, the euro sagged to a 13-month low against the dollar, down 0.7 per cent to $1.1450, after the Financial Times reported that the European Central Bank was anxious about possible losses at eurozone banks operating in Turkey.

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"Don't forget, if they have their dollars, we have our people, our God", he said.

The United States slapped sanctions on two Turkish officials earlier this month over a detained American pastor who is being tried on espionage and terror-related charges.

It is possible that Trump cited the lira's decline as a mere pretense for pressuring Turkey to release the American pastor.

Image: Donald Trump claimed 'relations with Turkey are not good at this time!'

Mr Erdogan has been putting pressure on the central bank to not raise interest rates in order to keep fuelling economic growth. It is unclear how that would justify higher tariffs on Turkey but not other countries.

In what appears to be a diplomatic riposte, Turkey later said Erdogan had held a phone call with Russian President Vladimir Putin to discuss economic ties.

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The Turkish foreign ministry hit back at Trump's comments, saying that the "only result will be harming our relationship" and vowing unspecified retaliation.

The collision results from inflexibility over two policies, the first being Erdogan's firm belief (against conventional economic theory) that high interest rates cause, rather than curb, inflation. (The last substantial hike was in January 2018; before then, it was in late 2013, when Turkey was dealing with the end of the U.S. Federal Reserve's quantitative easing program.) The country could also place controls on capital, but those can hamper private sector activity and won't be easy considering the government's relative inability to totally control private capital.

That is unlikely to mollify investors who are also anxious by the growing dispute with the United States.

The mere fact that the USA would impose sanctions on Turkey - a stalwart North Atlantic Treaty Organisation ally for decades during the Cold War - has increased uncertainty about the future in Turkey. Banco Bilboa Vizcaya Argentaria, UniCredit and BNP Paribas have the greatest exposure to Turkish debt and many of their loans are unhedged.

Meanwhile, new Treasury and Finance Minister Berat Albayrak, also the president's son-in-law, previewed a new economic program for the country.

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