Turkey is in a genuine currency crisis. The lira fell 30% over 3 days. Fundamentally speaking, the reason for the Turkish meltdown is primarily a large current account deficit (6% of GDP) and reliance on outside capital. Markets don’t care as long as liquidity stays abundant, but are turning toxic when global liquidity dries up due to higher interest rates, the Fed’s balance sheet shrinks and the US Dollar strengthens. Making things worse, there are serious doubts about policymakers’ ability to correctly assess what kind of storm is currently brewing and how to deal with it. Adding to the pain, a dispute between Washington and Ankara around the arrest of a US pastor in Turkey has prompted Trump to impose additional tariffs on Turkey this week – altogether, we have a perfect storm.
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