The Turkish lira has collapsed by over 20% in the last week. Should you care? Economists do. They’re concerned that Turkey’s collapsing economy will spill over into emerging markets. When economies crumble, they don’t necessarily fall straight down like a planned demolition. A domino effect of destruction may be in store. Investors beware!
What’s the Deal With Turkey?
The country’s economy has weakened. Turkey’s inflation was already running amok with an annual rate of 16%. Recep Tayyip Erdogan, the country’s authoritarian president, has seized control over Turkey’s economic policy. His decisions are undercutting the central bank’s independence.
Erdogan has appointed his son-in-law as a finance minister. Investors are panicking that the country is going under. They’re selling lira, buying dollars, and pulling out of Turkey. Head for the hills! The value of the lira is tanking.
The Domino Effect of Crumbling Economies
Turkey’s problems have the potential to spread to other developing countries. According to Gary N. Kleiman, an emergent-market investment consultant, “This has the potential to be a real crisis. Banks are overstretched, and soon you are going to see an increase in non-performing loans. It is going to spread.”
It wouldn’t be the first time that the fall of one economy triggered the downfall of others. In 1997, the Thai baht collapsed, setting off a financial crisis in East Asia. In 1998, the value of the Russian ruble crumbled and threatened the collapse of the American hedge fund Long Term Capital Management.
Is Turkey Going to Gobble up Other Countries?
There are already hints that Turkey may set off a similar chain reaction. Several European banks, including major ones in Spain, Italy, and France, are heavily invested in Turkish lenders. Many western banks have given out loans to Turkish companies. Argentina and South Africa are also dependent on loans from these countries.
As lenders get cold feet in Turkey, these businesses may start to withdraw their investments in Argentina, South Africa, and other developing countries. We’ll just have to wait and see if foreign investors stick around.