The Turkish lira plummeted to historic lows against the U.S. dollar on Aug. 9 and 10, leading Turkey towards a full-blown financial crisis that might yet engulf Europe.
The embattled lira, which has lost more than 35 percent of its value this year after shedding nearly 25 percent in 2017, last week alone lost about 14.6 percent -- its biggest one-day drop since early 2001. The lira's non-stop depreciation is boosting the cost of imported goods, especially food, and threatens to plunge Turkey into recession.
Turkey's sovereign dollar-denominated bonds also took a big hit. Many issues traded at record lows while Turkish banks took one to the gut as their hard currency debts fell precipitously. More bad news for banks: five-year credit defaults swaps rose to the highest level since March 2009. Astonishingly, this level was even higher than that for Greece, which endured three bailouts in the last decade.
Cristian Maggio, head of emerging markets strategy at TD Securities said any intervention by the central bank will have to be drastic -- and massive.
Some financial experts say drastic will have to mean an increase in interest rates to something around 500 basis points, or higher, but it can't be a mere 100 basis points increase. A 100 basis points hike is now too little, too late, said financial experts.
Last Friday, the lira plunged 15 percent on worries about Erdogan's influencing over monetary policy and exacerbating the situation was the country's relationship with the United States. Erdogan is an enemy of high-interest rates and considers them impediments to economic growth. Economic experts worldwide, however, hold the contrary view. Erdogan appointed his son-in-law as head of the central bank to prevent the institution from increasing interest rates.
The lira's fall on Friday left it down more than 40 percent since the start of the year. Experts agree the lira will continue weakening against the dollar. This year will become the sixth straight year of losses for the lira.
The lira's plunge on Aug. 10 shocked world financial markets even as tensions further deteriorated between Ankara and Washington. The U.S. last week implemented higher tariffs on imports from Turkey: a 20 percent duty on aluminum and 50 percent on steel. That punitive measure played a role in the lira's plunge last week.
