A financial crisis is brewing in Turkey

The Turkish currency is in a devaluation spiral and is trading at a record low against the dollar. The country was able to successfully place a billion dollar bond – but the interest rate was two percentage points above that of the last issue.

Banknotes of the Turkish currency Lira

AIn the face of worrying news from Turkey, the placement of a $ 2.5 billion government bond this week was seen as a success. After all, the first bond since February shows that Ankara still has access to the capital market despite the dramatic depreciation of the lira with new lows, the agency Bloomberg quoted traders as saying. But that has its price: at 6.375 percent, the coupon is 2 percentage points more than the last issue. Mexico had to offer only 1.35 percent interest on 750 million euros in September.

The market suspects that Turkey wanted to protect itself from even higher premiums that could threaten after the election in America if Joe Biden wins. The relationships are already bad. Senators in Washington have just called for sanctions against Turkey because the NATO member now wants to test the S-400 air defense system acquired by Russia. President Donald Trump has therefore excluded Turkey from acquiring new F-35 fighter jets.

Numerous military hot spots

The armed conflicts of Turkish President Recep Tayyip Erdogan in Syria, Libya, Iraq and now his support of the oil and gas supplier Azerbaijan in the war against Armenia are met with international criticism. He is at odds with America and Russia, including the EU. The fact that Erdogan had for weeks searched for gas in controversial waters off Greece and Cyprus prompted the EU to threaten sanctions, which further destabilized the currency of the state, which is dependent on trade with the EU. The fact that the restrictions did not then apply did not help the lira either. On Friday, more than 7.95 lira had to be paid for one dollar at times, more than ever before.

The comparison with other emerging countries shows that the decline in value with the corona pandemic has little to do with an overburdened, politically dependent central bank, analyzes the DZ-Bank. Commerzbank analyst Tatha Ghose explains that Turkey’s “freely available foreign exchange reserves” were minus $ 8 billion at the end of September. So much for official figures. The former head of the statistics agency doubts their truthfulness. But he’s now an opposition politician. Inflation is in double digits, the real interest rate is negative despite the increase in the key rate by 2 percentage points to 10.25 percent. DZ Bank sees a balance of payments crisis with drastic effects on the horizon, Ghose from Commerzbank says: “Ultimately, it will be difficult to avoid something like an IMF aid package.” Erdogan has ruled that out.