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Old 12th November 2017, 09:38   #1 (permalink)
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Turkey faces an economic dilemma that will have global implications

A country's decision to borrow money is not always strictly economic. Take Turkey, whose ratio of gross external debt (all public and private sector debt) to GDP has jumped from 39% in 2012 to 52% today.

Turkish President Recep Tayyip Erdogan has been pushing to increase available credit to spur economic activity. This is a political goal, though one motivated by economic objectives.

But Erdogan found that there was not enough domestic capital available to meet Turkey's lending needs.

Borrow Domestically or from Abroad?

When a country chooses to borrow, it has two sets of choices.

First, should it borrow domestically or from abroad? Second, should its debt be denominated in domestic or foreign currency? Each option has its own implications, but it is particularly constraining when a country borrows from abroad in a foreign currency.

When debt is borrowed in another country's currency, the borrowing country no longer has the option to depreciate its own currency through monetary policy in order to decrease the relative value of its debt.

The other risk involved in foreign currency borrowing is that the borrower's currency will decline in value and increase the cost of debt service.

For example, if a country borrowed $100 million at 10% in US dollar-denominated debt, it would owe $10 million per year.

If the exchange rate between the borrower's currency and the dollar is 2 to 1, then that $10 million is equal to $20 million of its own currency per year.

But if its currency depreciated and the exchange rate to the dollar became 4 to 1, it would still owe $10 million, but in terms of its own currency, that figure would be $40 million in debt service per year.

Turkey's Dilemma

The pitfalls of borrowing in foreign currency are clear. But for Turkey, domestic borrowing is not a sufficient option.

Banks lend money that is entrusted to them in the form of deposits. The quantity of deposits is determined by a society's proclivity to save. If deposits are lacking, then the bank will have only so much domestic capital to lend.

Herein lies Turkey's dilemma: The government wants to boost economic growth by extending greater credit to encourage investment, but there isn't enough domestic capital in the banks to meet these goals.

Turkey's solution to this capital shortfall has been external borrowing, though with some restrictions.

Households are not allowed to take out consumer debt that is denominated in foreign currency. Instead, it is mostly financial institutions that borrow in foreign currency-mainly US dollars and euros. And once the capital flows into Turkey, banks extend credit domestically in Turkish lira.

With this maneuver, Turkey accepts greater long-term financial risk for short-term economic growth. More credit is available for projects now. But with every borrowed dollar or euro, Turkey faces a greater financial burden should the lira's value fall relative to the dollar or euro.

Erdogan, who overcame a coup attempt just last year, cannot afford the risk to his presidency that a flailing economy would create. Maintaining positive economic momentum is critical to ensuring the continued support of his base.

More here....
Turkey economic dilemma - Business Insider
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Old 12th November 2017, 16:21   #2 (permalink)
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Re: Turkey faces an economic dilemma that will have global implications

Quote:
Erdogan, who overcame a coup attempt just last year, cannot afford the risk to his presidency that a flailing economy would create. Maintaining positive economic momentum is critical to ensuring the continued support of his base.
The wily old fox must be realizing the threat to him if the economy fails Bloomberg report below, and although it caused some rivalry, no problem for him, that will be neutralized soon, as PM Yildirim who won't be in charge after the new Presidency.

Bloomberg Politics.
Days after last year’s failed coup, Turkish President Recep Tayyip Erdogan and his allies set to work creating a wealth fund to safeguard what is now about $200 billion of assets, including cash, property, and shares.

Since then, officials have been trumpeting the formation of such a large pool of capital outside the budget as a kind of cure-all, piquing investor interest with pledges to use it for everything from defending the lira and buoying the stock market to recapitalizing banks and cutting borrowing costs.

https://www.bloomberg.com/news/artic...nternal-strife

And if what I read about of the Reza Zarrab story is true, if there is a return to sanctions on Iran soon by the US and allies, Turkey's government of Erdogan, can again profit handsomely becoming the sanction busting clearinghouse, trader proxy for countries wanting to buy Iranian Oil etc , with payments made in gold beating US sanctions. Just they will need another scapegoat instead of Zarrab .
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