On Friday the Turkish lira fell to its lowest level on protracted concern about geopolitical and economic factors that have been steering Turkish policy decisions of late. The lira dropped 17% against the US dollar, prolonging a slide that has attracted the attention of global markets. Throughout the day, a growing number of media outlets placed blame for the lira freefall on President Trump’s announcement of increased metal tariffs on Turkey, and the deteriorating relationship between Ankara, and Washington. This on-the-fly analysis fails to take into consideration the role Turkish President Erdogan’s unconventional economic policies have played. After the president won re-election in June, he assured the Turkish populace that his newly acquired near-absolute executive power would enable him to repair Turkey’s faltering economy. Unfortunately for Erdogan, he failed to make good on his promise, and the economy continues to backslide.
Turkey’s geopolitical situation brings additional uneasiness. The continuing rift with the United States is only exacerbating Erdogan’s economic problems, and highlighting the economic vulnerabilities that have built up during his time in power. Trump was entirely correct when he said US-Turkish relations are ‘Not good at this time.’ In fact, this is something of an understatement. The US-Turkish relationship has been souring for a long period of time, and the current tensions show no sign of easing.
Also on Friday, Turkish Treasury and Finance Minister Berat Albayrak unveiled the nation’s new economic policy to the world. He said Turkey will be undertaking major cost-cutting steps in the public sector, and the government is moving to secure 35 billion lira (roughly $5 Billion at the moment) through increased revenue and savings. He also said Turkey will be shifting to a more efficient model for funding mega-projects, however, he did not elaborate further.
Unfortunately, Albayrak’s presentation appears to have done little to allay fears in Europe. The ECB (European Central Bank) is examining the exposure of European banks to Turkey. Bank shares fell when word of this became public. Talk of a possible Turkish bail out at some point in the future was also heard today, though the likelihood of Turkey becoming the next Greece is remote for now. Still, a Turkish bailout scenario is frightening to say the least, and could very well lead to the permanent breakup of the European Union.
Not surprisingly, the new Italian government’s calls for debt relief from the European Central Bank (ECB) appear to be falling upon deaf ears. The ECB has released a statement saying current treaties in place forbid such a move. German Chancellor Angela Merkel ruled out the possibility. In an interview published today in Frankfurter Allgemeine Sonntagszeitung Merkel said the eurozone should not be transformed into a ‘debt union.’ These dismissals set the stage for a potential showdown between the EU and Italy’s populist government over the future of Italy’s place in the eurozone. Giuseppe Conte, the new Italian prime minister, is expected to meet with Merkel, and French President Emmanuel Macron at this week’s G7 summit in Canada.
Italy will not be the only major point of discussion in Quebec later this week. US trade tariffs, and their potential impact will be discussed at length. At midnight on Friday tariffs on steel, and aluminum imports from the EU, Canada, and Mexico were put into effect. The US has been negotiating with all parties involved. Progress has been slow in coming, however, prompting the US to take unilateral action. The EU has promised strong countermeasures in response.
Fears of a global trade war have been looming for some time. Negotiations between the US and China appeared to have pushed much of the concern to the background for some time. Markets had stabilized, and investors seemed to be getting over their jitters. If the EU, Canada, and Mexico are unable to reach some sort of compromise with the US this week, those fears could spiral out of control and have an adverse effect on global markets, and the global economy as a whole.
This promises to be a busy upcoming week in Quebec.
Sometime in the next twenty four hours, Greece’s future in the Eurozone could be determined. An emergency summit is set to get underway on Monday in Brussels. The single item on the agenda is reaching a deal in the Greek debt crisis. If no revisions are made or agreements reached that appeal to both sides, Greece will default on a 1.6 billion Euro IMF loan at the end of June. Failure to repay the loan might result in Greece withdrawing from the Euro and possibly from the European Union entirely. As of this evening (2023 Hours on the east coast of the US) representatives from all sides are burning the midnight oil in the hopes of reaching a tentative agreement of some sort by tomorrow morning.
The nature of the current situation is spherical. The IMF and European Central Bank (ECB)refuse to release the last 7.2 billion Euro installment of bailout funds to Greece until the nation agrees to introduce economic reforms that the IMF and ECB deem essential. Greece needs the new funds to be able to pay back the earlier bailout. The Greek population is already up in arms over the austerity measures that have already been imposed by Greece’s creditors. Wages and pensions have been slashed dramatically, and the unemployment rate in Greece has reached upwards of 25 percent.
This weekend, Greeks took to the streets to voice their opposition to the austerity measures. In recent days, Greek citizens have also been withdrawing billions of euros. The national banking system is under heavy pressure. Greek Prime Minister Alexis Tsipras came to power on a wave of anti-austerity sentiment. Right now he finds himself walking a tightrope as he tries to reach a compromise with Greece’s creditors and lenders without inflaming the passions of the Greek people further. The survival of his government and his nation as a whole are at stake.
For tomorrow, there are three distinct possibilities:
#1 No deal is reached. Greece defaults on the IMF repayments. The ECB puts a stop to all emergency monetary assistance, resulting in a run on Greek banks, economic chaos in Greece and the possibility of a Greek exit from the euro and EU entirely.
#2 Greece agrees to a last minute agreement with the creditors and remains in the EU.
#3 No deal is reached, but both sides reach a temporary solution in the hopes of resolving the issue permanently at a later time. Greece remains in the EU for now.
The second scenario is the most favorable outcome for all parties. The fact of the matter is that Greece and the EU have been down this road before. The inability of the EU and Greek government to construct a permanent solution to the Greek debt crisis, coupled with the anti-austerity feelings of Greek voters continue to keep the notion of an eventual Greek exit from the EU alive. After tomorrow, hopefully we will have a clearer idea of how this is going to play out.
Happy Father’s Day!
*Note- This weekend’s Defending Poland piece will be posted on Friday. Apologies for missing the self imposed deadline….again :)*