Question

Facts before financial crisis for the Turkish Currency and Debt Crisis 2018 and facts during the financial crisis

Answer 1

Turkish Currency and Debt Crisis 2018 occurred in Turkey. It was basically a financial and economic crisis. During that crisis, what happens is the currency of Turkey, Turkish Lira falls down, high inflation occurs, borrowing costs increases and increasing loans defaults. The basic reason for this crisis was the excess of current account deficit and huge amount of private foreign currency denominated debt of Turkish economy. Also the impractical interest rate policies of the president was also a reason. Consequently, corporate debt defaults and economic growth shrinks.

In order to tackle the crisis, finance minister at that time, Mr. Albayrak introduces an economic program. It was a 3-year plan for governing in inflation, stimulate growth and reduce the deficit of current account. In this plan, expenses of the government were expected to be reduced by $10 billion. This plan focus on the areas of adding the value of the country in order to rise the volume of exports and long term production capacity in order to bring in existence 2 million jobs by 2021.

During this crisis, Turkey lenders were not able to utilize their USD or EUR currency debts because in Turkish Lira, the value of earnings lose value. Financial institutions reduced to 1/3rd of the total by mid of April. Increase in demand from the companies for re-arranging of debt repayments makes the lenders in trouble by May. Adequacy of capital as well as asset quality of Turkish banks became worse. Large lenders lost around 63% of the value of the US dollar which was sold for 40% of book value. For reducing the demand of business as well as consumers, banks increases the interest rates for such loans to around 20%. During the middle of 2018, unsold stock for new housing rises, whereas consumer price inflation were reduced in new home prices by more than 10%. By September 2018, Turkish lira initiated to recuperate its losses and contraction of current account deficit continued.

The main facts related to Turkish Currency and Debt Crisis 2018 are :

• Over the last decade which was extremely financed by capital inflows from abroad, Turkey had a large credit boom
• Turkey can get advantage from borrowing from abroad and rich country investors gets advantage from lending to such countries
• After huge borrowing from abroad, countries face a boom-bust cycle , when there are clear benefits of market borrowing
• While companies and government borrows in dollars instead of domestic currency, mismatches in currency occurs
• Short borrowings by private-sector in US dollars
• Generally, at the time of a financial crisis, central bank increase the interest rates. However, in this crisis, such an issue did not arise
• Political dimension
• Administration of the US neither became a cause, nor a helping hand for this crisis