Turkish lira is once again under attack…

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When most of the world is struggling with the pandemic, Joe Biden recognizes the Armenian genocide by Ottoman forces in 1915. Of course, it is not about reestablishing justice but a result of the US losing once a closest strategic ally across the Middle East – Ankara. With this move, the American president looks to correct Erdogan’s behavior, in particular, his close ties to Russia.

What will happen to Turkey now?

Many predict that the Turkish lira will suffer another round of devaluation, this time up to 10%. It may sound crazy but, over the past eight years, the country’s currency devalued 7 times. And when it seemed like nothing could be worse, the reality shows the opposite. First, Erdogan believed that keeping interest rates low would help to stabilize the currency, and then Joe Biden sucker punched an ex-empire. How Turkey will react is not yet clear. However, we will hear about it very soon.

One should keep in mind that Turkey has a critically low savings rate of up to 13%. This is very little, even for a developed country, thus Turkey is critically dependent on foreign investment and loans, and banks and companies of the republic borrow in foreign currency. Hence, any foreign policy conflict is immediately reflected in the flow of foreign money to Turkey.

Who will also lose with lira devaluation?

It is important to remember that we live in a highly correlated world, meaning that if one country is suffering, the other will also do so. For example, if Turkey fails to pay its debt, creditors will eventually lose money. Further devaluation will have a severe negative impact on consumption, confidence, and economic activity. This, in turn, will hit the country’s trading partners, especially the European Union.

 

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