Turkey’s long expected currency crisis has begun last week after when the diplomatic and political crisis with USA over the evangelical pastor Brunson deepened instead of being resolved. Turkish Lira crashed and lost 17% of its value against US dollar in a week when the markets closed on Friday, August 10th. Turkish Lira had already lost 33.4% of its value until last week since the beginning of 2018, last week from August 3rd on, it lost additional 17% and down to 5.94 against US dollar when the markets closed on Friday August 10th after seeing 6.85 levels during the day. Turkish economy has been on the brink of falling apart since the beginning of 2018 with its high private foreign debt, high current account deficit, so high dependency on foreign capital flows, and increasing inflation and unintentionally increasing interest rates. The political crisis with USA increases worries that Turkey may not be able to pay its foreign debt.

As HalaGazeteciyiz reports that it was expected that last week the diplomatic and political crisis with USA could resolve when Foreign Minister Mevlüt Çavuşoğlu and his colleague Pompeo had a face to face meeting on August 4th and expressed their eagerness from both parts solving the problem with dialog. Following this meeting, on August 8th, US Deputy Secretary of State John Sullivan met with Turkish Deputy Foreign Minister Sedat Onal along with the delegation of roughly half a dozen official to discuss Pastor Andrew Brunson, however, there were no sign of a breakthrough after the meeting for the crisis. The reports suggest that American side demanded immediate release of Brunson who has been held in home arrest after more than a year jail time and this demand has not been replied yet by the Turkish side.

While the political crisis continued, Turkish Lira started to hit new record levels against Dollar and Euro. Turkish President Erdoğan could postpone the economic problems before the elections by using public expenditures and funding to fuel the economy. Erdoğan’s insist on keeping interest rates low has been one of the main problems investors’ lack of confidence which triggers further losses to Turkish Lira as the economy depends intensively on foreign money flows.  Economic experts and international economic institutions forecast that Turkish economy will stop growing in the third quarter and begin to contract in the fourth quarter. Erdoğan government seems to fear the economy to contract faster and higher if they increase the interest rates now to defend Turkish Lira and control the increase in inflation stemming from Turkish Lira’s devaluation. Despite Erdoğan’s pressures, the Central Bank had to increase its policy rate to 17.75% in June and did not change it again in spite of calls from markets. With consumer price index being 15% and dollar being in rise, interest rates on 2-year Turkish bonds hit 24% even if the central bank seems to be pleasing Erdoğan. The Turkish economy appears to be stuck between dollar/euro and interest rate impasse, further rising the cost of currency crisis.

Last week observers were expecting to see the economic and strategic plan that newly formed Erdoğan government to deal with the problems. First the President Erdoğan announced their 100 days of activity plan of the government 10 days ago, on August 3rd. The activity plan did not meet the expectations and dollar kept increasing at the beginning of the week. Then it was announced that Berat Albayrak, son-in-law of President Erdoğan and Minister of Finance and Treasury will hold a meeting on August 10th to explain the new economic model of the government. While the Central Bank kept silent for all the week, despite its main responsibility to defend Turkish Lira and secure the financial stability, Berat Albayrak’s meeting was anticipated to indicate future steps of the government and calm the situation down.

Berat Albayrak’s meeting was supposed to happen at 11.30, but it was first rescheduled to 14.30pm, then Albayrak could not start the meeting as President Erdoğan had a rally in Bayburt one of the cities with highest support for Erdoğan. Albayrak waited his-father-in-law finishes his talk with the representatives of the private sector, leading comments that it is implying who “the boss” is. Erdoğan declared that he sees there is an economic attack to Turkey by foreign enemies and Turkey will start fight back. Turkish Lira, already depreciating at record levels, entered in a free fall pace after Erdoğan’s talk. For a final drop, while Erdoğan was speaking in Bayburt calling the citizens to turn their dollar and euros to Turkish Liras to fight back the economic plot against the country, U.S. President Donald Trump tweeted that he is doubling tariffs on aluminium and steel imports from Turkey to 20 percent and 50 percent, respectively. The U.S. had already imposed 10 percent and 25 percent additional tariffs on aluminium and steel imports respectively from all countries on March 23. The U.S.’ additional tariffs on steel imports from Turkey will be effective as of August 13. The share of total export to USA in the total Turkish exports is 5.5% and the share of steel and aluminium exports of Turkey to the total exports is only 7%. The government declared that they will keep backing steel and aluminium producers against these tariffs. Albayrak’s new economic model presentation was a disappointment for objective observers and economic experts as it did not have any concrete measures and direction, however, the representatives of private sector expressed that they have full confidence in the Albayrak and the government.

Erdoğan had three public meetings since Friday 10th of August as if he was campaigning for the elections. In three public addresses, Erdogan sharply criticized the United States, for doubling tariffs on Turkish steel and aluminium imports, calling the move as an “operation” and depicting the plunge in the Turkish currency’s value as an “economic war” against Turkey. Erdoğan said that Turkey would find new alliances and new markets and had a talk with Russian Leader Putin on the phone just after this meeting. He also declined the possibility for the Central Bank to increase interest rates by saying that Turkey wouldn’t accept an international bailout. His message was essentially the opposite of what investors have expected from Turkey. Erdoğan kept his stance towards the US in a New York Times piece he wrote as well.

The Turkish lira lost more than 10% only on Friday against the U.S. dollar, and started worries if global markets, particularly European Banks that have been provided funds to Turkish Banks, might be affected.

In one of his three public addresses at the weekend on Sunday, Erdoğan warned of drastic measures if businesses withdraw foreign currency from banks amid the country’s ongoing currency crisis. His warning was not taken as a good sign and at the early morning of Monday August 13th, Turkish Lira dropped to a new record level of 7.21 against dollar. In order to narrow the damage Erdoğan’s words might cause, Turkey’s finance minister said on Sunday night that the government has prepared “an action plan” aimed at easing market concerns that have led to a slump in the value of the nation’s currency. In an interview with the newspaper Hurriyet, Albayrak also assured that the government had no plans to seize foreign currency deposits or convert deposits to the Turkish lira. He also tweeted at 1am in the morning of today (Monday) that “As of Monday morning, our institutions will take the necessary actions for easing markets… All our precautions and actions plans are ready….Deposits will not be seized, deposits in foreign exchanges will not be converted to Turkish Liras. But these lies will be defeated with the legal measures.”

After Albayrak’s tweets early Monday morning, two steps came from the Cental Bank and the public institutions watching capital markets and businesses. The Central Bank announced new measures aiming to increase liquidity of the banks. The central bank said it would “provide all the liquidity the banks need” in managing the Turkish lira as well as resume its intermediary function as the foreign exchange deposit market, among other measures. Those measures seemed to be effective for a while, as the lira was down just 2.2 per cent at TR6.5661 per dollar on early Monday following the announcement, having saw a record low of 7.2 earlier in the day, however it started increasing again in half an hour touching 6.8 again. The second move came from Capital Markets Board of Turkey and The Financial Crimes Investigating Board. Both institutions declared that they have started investigations against people who are spreading fake and manipulated news about Turkish businesses. This move is parallel to Erdoğan’s statements about considering the economic problems as a result of foreign attack to weaken Turkish economy.

Meanwhile, the possibility for early local elections have already started to be discussed. As Halagazeteciyiz reports, while it is not known whether the elections will be held in November or in March, the predetermined date, JDP has already started preparations. Those who want to be candidate from the JDP started the ball rolling. It has been rumored that there will be surprise candidates, among which there could be former ministers and MPs.