Turkish financial crisis: Lira hits record low

[2952-0-0]

This is a textbook example of a financial crisis that was caused by too much foreign debt and an overvalued currency. It didn't help that Turkey's president has a big mouth.

It appears the big Turkish companies had previously borrowed vastly in dollars or euros to take advantage of lower interest rates. They had been struggling to repay these debts, and this had led to fears of bankruptcy that would threaten Turkish banks, which caused a run on the currency. This, in turn, would cause the foreign debts to explode in terms of Turkish currency, which would turn into a self-fulfilling prophecy. It doesn't help that Erdogan appointed his son in law to be finance minister and made some bizarre outbursts which reveal his financial illiteracy.

What Erdogan "should" do is what Mahathir in Malaysia did in 1998: blame "foreign capital" (i.e. Jews) for domestic consumption (not that he actually should), impose capital controls, and seize the banks to prevent a complete failure. The European banks who had lent to the Turkish companies will have to eat losses. The Turkish Lira will stabilize at a much lower rate, which would eventually lead to an export and tourism boom. But not before plenty of grief within the country.