Turkey faces painful steps after the lira has fallen

Istanbul market

If the lira depreciates against currencies such as euros and dollars, the burden of its debts increases.

(Foto: Bloomberg)

Düsseldorf, Frankfurt Turkish President Recep Tayyip Erdogan has an idiosyncratic explanation for the current weakness of the local currency, the lira. Turkey is in an “economic war” against a “devil’s triangle” made up of interest rates, exchange rates and inflation, he said at the weekend. Erdogan has repeatedly spoken out in favor of low interest rates because, contrary to current economic theory, he takes the position that this will lead to lower inflation.

This strategy has not yet convinced the markets: The lira exchange rate continues to fall unchecked. In October, the Turkish currency suffered its highest monthly loss in two years. It depreciated by seven percent in this period against the euro alone.

Over the year, the losses amount to around 46 percent against the euro – and around 40 percent against the dollar. The lira is thus in a dangerous downward spiral: the higher the losses, the greater the panic – which leads to further losses.

Analyst Tatha Ghose from Commerzbank believes it is possible that the lira will exceed the mark of nine lira per dollar in the coming weeks or months – currently the rate to the US currency is around 8.40 lira and to the euro at 9.75 Lira. In his view, there is no easy way out to stop the negative trend. All options are painful.

What is even more crucial: All options completely contradict Erdogan’s economic view. He has repeatedly called himself an “interest enemy” and has repeatedly ruled out a rescue program by the International Monetary Fund (IMF). In addition, the question arises: Can Erdogan survive such an IMF program politically at all?

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