Turkey shakes summer thin markets, but contagion risk is contained

Turkish Lira depreciation in August is the consequence of an unsustainable growth regime financed by rising private debt (mainly external debt), combined with a current account deficit that had become excessively financed by short-term capital flows. In our view, the economy is experiencing a classical balance of payment crisis. Even before the recent crisis, Turkey was the most vulnerable country among the main emerging markets (EM). A mix of monetary policy action, economic adjustments and temporary recourse to some forms of capital control could potentially help to mitigate the crisis, with some de - escalation possible on the geopolitical front between the US and Turkey, but in the short term, volatility will remain high.