Like many other people I’ve noticed reports about market troubles in Turkey. The last report I read put the exchange rate drop for the Turkish Lira at about 40% since the beginning of the year, and I watched a European equities index for Turkey plunge as Erdogan gave a speech on Friday (morning ET).
Many of the reports I’ve read about Turkey contain some analysis and recommendations about how interest rates in Turkey should move. This is all well-meaning, I am sure, but the rationale with most of these don’t make much sense to me.
Some have said that a large portion of Turkey’s debt obligations are in euros and dollars and the exchange rate change puts repayment of these obligations in jeopardy, and that is why domestic interest rates need to change in a rather large upward movement. While it may be true, in the very short run, because prices adjust, I don’t see why it would be a problem or why a development such as libra instability would not be baked into the debt contact in much the same way anticipated inflation is baked into most domestic debt contracts.
This interest rate recommendation also ignores the lesson recently learned that intervention into currency markets to manipulate the exchange rate as a policy practice, unless the policy is to peg to the dollar, may produce some unexpected and undesirable domestic macroeconomic results. If the concern is Turkish bankruptcy as far as foreign obligations are concerned, then doing such a thing is probably not wisest of recommendations because setting off a lira debt deflation would only guarantee such an outcome.
I think the reality is that the current political and diplomatic situation in Turkey doesn’t lend itself to financial stability particularly well, and no matter what happens with Turkish monetary policy, with Erdogan doubling-down on bad policy, that reality isn’t going to improve any time soon. Of course, my opinion of the situation and Erdogan himself based on information I have is that I am surprised the sell-off hasn’t happened sooner. After all, Erdogan did publicly threaten to attack American military forces in Syria; they snatched the American pastor as a bargaining chit two years ago, and they’ve been jailing and killing Kurds without due process.
But I am not so consumed with my feelings about these to not say anything at all about what others are suggesting that Turkish economic policymakers should do if I think it’s probably the wrong advice for the wrong reason. The better medium-term outcome, as far as the Turkish themselves people are concerned, is to allow the at least some of the excess be absorbed by the domestic supply side so that reallocation can take place without a lot of unnecessary drama that does nothing but hurt the people at the very bottom of the economic “food chain” who couldn’t be farther removed from the antics of their government. Erdogan and his sycophants are racist tyrants while the average Turk is as much their victim as the rest who don’t deserve a plague of tight money on top.