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Turkey Financial Crisis

Since August, Turkey has faced a financial a crisis because of a conflict with the United States (US) and this seems to be influencing other countries’ economies as well.

A Conflict Between Turkey and the US
Turkey and the US have been in dispute over Turkey detaining an American pastor for nearly two years. The pastor was accused of helping the coup d’état attempt against the Turkish President in 2016. On August 1st, 2018, the US president, Donald Trump, announced sanctions on two Turkish officials in the US and demanded the release of the American pastor. As Turkey refused to do so, however, the US government announced that it would double tariffs on Turkish steel and aluminum imports. In return, Turkey also increased tariffs on the imports from the US including cars, alcohol, rice, coal, and cosmetics. This diplomatic conflict between Turkey and the US resulted in a crisis on Turkish currency and finance.

The Response of Turkish Government
The value of the Turkish currency, the lira, against the US dollar hit a record low, decreasing more than 40% this year. Global credit rating agencies, Standard & Poor’s (S&P) and Moody’s, downgraded Turkey’s credit rating. Regarding the economic chaos in the country, Turkish president, Recep Tayyip Erdoğan, condemned the US publicly and opposed raising the interest rates. The Finance Minister of Turkey also announced that there was no plan for International Monetary Fund (IMF) bailout. Instead, the Turkish government limited the amount of foreign exchange swap transactions of banks, and The Central Bank of the Republic of Turkey (CBRT) said that it would provide as much liquidity to the banks as they needed. Internationally, the Turkish President announced that Turkey would find out new alliances other than the US and cooperate with other countries including Germany, France, Qatar, and China. Turkey also strengthened military cooperation with Russia, by buying a missile system from them.

Influence on the World Economy
Turkey’s financial crisis poses a threat to other countries’ economy as well. In particular, several banks in Europe have loaned a lot of money to Turkey. If Turkey’s economy were to get worse and become unable to repay a loan, it would have a negative effect on the European economy. In fact, since Turkey’s financial crisis occurred, some European stock markets closed lower. Some experts said, however, the European economy would not be influenced that much. It is because that only a few banks in Europe are related to Turkey and that most banks have improved banking systems. Turkey’s financial crisis poses another threat on other developing countries including Brazil and Argentina because it may cause investor confidence to shrink. Regarding Korea’s economy, the crisis would not have a big impact on Korea because the country has different fundamentals from Turkey where the economy is vulnerable, said Senior Deputy Governor at Bank of Korea (BOK).

정선우  jsw5861@skku.edu

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