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Turkey crisis could spread beyond its shores

The strengthening US dollar, rising debt levels in Turkey, and lack of sufficient foreign exchange reserves are pulling the lira down.

It's not just Turkish lira, but many other currencies that are weakening and touching new lows. The slide is creating nervousness, and impacting the performance of stock markets, which are essentially barometers of confidence in economies they represent. So, is the Turkish lira to blame for this? How is its performance connected with fluctuations in stock markets elsewhere, and falling currencies in emerging markets (read: Indian rupee, South African rand, Indonesian rupiah)? Well, the answer primarily lies in the strength of the dollar and relatively less demand for gold.
Traditionally, investors have viewed gold as a safe haven. Individual and institutional investors, especially from the emerging markets, have been investing in the yellow metal for uncertain times. However, the trend seems to be changing in favour of the US dollar. The price of gold has tumbled about 14 per cent since the last quarter of 2017, and the US dollar instead has risen. With interest rates rising in the US, investors could be finding it more profitable to invest in the greenback, which is keeping the demand high.
The strengthening US dollar, rising debt levels in Turkey, and lack of sufficient foreign exchange reserves are pulling the lira down. And this is a problem for Turkey, and a lot of other markets that have exposure to it. Over the years, Turkey has relied heavily on foreign-currency debt to fuel growth. Data from the Bank for International Settlements suggests, Turkish borrowers owe Spanish banks about $83.3 billion; $38.4 billion to the French; $17 billion to Italian banks; and $14billion to the Japanese. If Turkey fails to honour its commitments, it could impact banks and economies in Europe and elsewhere, which is why jitters are being felt way beyond the shores of Turkey.
Turkish President, Recep Tayyip Erdogan, who has been in power for more than a decade, had insisted on keeping interest rates low for years. Populist policies don't always work in the best interests of the people, and leaders like Erdogan would do well to realise that. It's a shame that a country that was once among fast growing economies is now on the verge of bankruptcy. Turkey won't achieve much by boycotting US electronics; it must swallow the bitter pill of reforms and seek help to contain the crisis, before it spills across the world.