
Turkish Lira Rates Blow Out to 1000% After Currency Intervention - JumpCrisscross
https://www.bloomberg.com/news/articles/2020-08-04/turkish-lira-rates-blow-out-to-1000-after-currency-intervention
======
bkanber
The Turkish Lira experienced runaway inflation in the period 1990-2005; in
1990, one USD = 2500 TL. In 2005, one USD = 1,350,000 TL. A loaf of bread cost
200,000 TL or so.

Erdogan became PM in 2003; in 2005 the Turkish government introduced the "new
Turkish Lira" ("YTL") by dividing the currency by 1,000,000.

Around the same time, Erdogan invested heavily in infrastructure projects,
boosting the lira.

IMO, this is how he largely rose to populist power -- the economy grew for a
short while, and he solidified his base early on.

But since then he's continually blocked the central bank from adjusting rates,
presumably to maintain the appearance of a strong economy. This once again
caused an inflationary economy.

Now those chickens are coming home to roost. The Turkish lira has been falling
steadily against the dollar, and this seems like a move on Erdogan's part to
continue the farce and maintain appearances of a strong economy.

He's very scared of the economy being weak, because that was his original
source of power with the populace.

This is only an armchair analysis. Take it with a grain of salt.

~~~
nurettin
It is only armchair analysis. But my arm chair has better overall texture and
victorian motives and comes with a tea table carrying a huge pile of salt.

If you take a look at GDP graphs of eastern europe, russia and the middle
east, you will see that every GDP in the region rose dramatically over the
period of a few years in the early 2000s. This increase in GDP in the region
was not caused by turkey's investment in infrastructure, it was caused by
foreign investors (mainly by the US and major players in Europe) trying to
bolster their own economy by supporting emerging markets. And it worked.
Turkey's istanbul stock market went from 20K to 70K points and foreign
investors made a lot of money. There was a period where USD and EUR were on
par with the YTL.

When the hot credit finished, Turkey started experiencing inflation again,
because not enough of the money was spent on infrastructure.

It was partially spent on better healthcare and education, which won the
popular vote for a second time. At this point, government was running on
fumes, domestic debt went rampant.

Authoritarianism, nepotism, militarism, conservatism, religiosity, nationalism
and xenophobia worked part of the way to support this sort of economy. Seeing
success in its ways, and still having some popular support, the government
parted ways with its next leader and changed the law to get its leader elected
a third time.

At this point there were enough dissenting voices that the mayorship of
istanbul was lost in an election. Government forced another election and lost
again.

Where are we now? We are at a point where whoever wins, the whole population
will lose. Not that different than the 90s, but at least we've got iphones and
macbooks.

~~~
wcoenen
> _started experiencing inflation again, because not enough of the money was
> spent on infrastructure_

I don't get it. Why would more infrastructure spending protect against
inflation?

~~~
bkanber
Investing in an economy increases production. If productivity increases, but
currency circulation remains the same (or at least doesn't outpace
productivity), the value of the currency will increase. This is only one of
the various modes of inflation, but that's the idea w.r.t infrastructure
spending.

~~~
perl4ever
I follow up until the last sentence. If the value of the currency increases,
then that's _deflation_. So you explained reasonably lucidly why we should
expect what I guess we agree didn't happen.

~~~
bkanber
I was describing deflation on purpose, because deflation [is supposed to]
happens after solid infrastructure investment.

My last sentence was misleading because I said "this is one of the various
modes of inflation", but what I really meant was "this is one of the various
modes of an inflationary/deflationary economy".

------
cperciva
If I'm reading this correctly, the rate in question is an _overnight_ rate,
but quoted _annually_. A better way of looking at it is probably the overnight
premium -- which looks like it's somewhere around a 1% cost to borrow money
today to be paid back tomorrow.

EDIT: And this is specifically in the _offshore_ market. The article doesn't
mention high interest rates for _Turkish_ banks to borrow Lira. This sounds
like more of a matter of currency controls and market manipulation rather than
an indicator of a currency collapse or the return of hyperinflation.

~~~
Areading314
Interest rates are almost always quoted in the annualized rate (eg. APR)

~~~
cperciva
Sure, but that's not necessarily a useful way of looking at the overnight rate
in this case. Annualized interest rates are useful when you're looking at the
_value_ of an investment changing over time; but in this case the _nature_ of
the investment is changing -- because the critical property "can be delivered
to close a contract today" is satisfied by today-lira but is not satisfied by
tomorrow-lira.

~~~
phyalow
Uh, all interest rates are quoted annualised, thats to make them directly
comparable... to get the notional change just divide it by (365/tenor). Your
other points are flatly nonsensical.

------
gshubert17
The exchange rate during the past 12 months is shown here,
[https://www.xe.com/currencycharts/?from=TRY&to=USD&view=1Y](https://www.xe.com/currencycharts/?from=TRY&to=USD&view=1Y)

and doesn't look as bad as the headline.

~~~
otoburb
Back to roughly where the TRYUSD pair was in August 2018.

------
cs702
Governments, businesses, and households in emerging/developing economies have
been borrowing like drunken sailors since 2010. It's well documented. For
instance, in late 2019, right before the economic shock of the pandemic, a
team of academics at the World Bank published a comprehensive study of debt
issuance by governments, businesses, and households around the world, titled
"Global Waves of Debt" (available at
[https://www.worldbank.org/en/research/publication/waves-
of-d...](https://www.worldbank.org/en/research/publication/waves-of-debt)).
Let me quote their key findings:

* "The global economy has experienced four waves of debt accumulation over the past fifty years."

* "The first three debt waves ended with financial crises in many emerging and developing economies."

* "The latest, since 2010, has already witnessed the largest, fastest and most broad-based increase in debt in these economies."

* "Debt distress... [is] more likely."

The pandemic has inflicted the largest economic shock in half a century to
emerging-economy governments, businesses, and households that had borrowed the
most ever in proportion to GDP prior to the pandemic. Turkey, I'm afraid, may
be only the proverbial canary in the coal mine.

------
stefan58u
Thanks to Erdogan and his actions, Turkish Lira hasn't been any weaker before.
The gap will increase for sure.

~~~
kyriakos
Seems like everything Erdogan does is to ensure his future reelections but
after a while he can't hide the truth. To be fair he's been in office for 17
years so his actions have helped his career but can't say the same for Turkish
economy and its long term international relations.

~~~
luckylion
I'm not so sure about Turkey taking any long term damage. All they need to do
is elect a new leader who will ask for forgiveness. The Russians don't care at
all, the US see more than enough military value in Turkey to not care, and the
EU does not believe in punishment as a deterrence ergo they will quickly
switch back to business as usual as well and help by pumping in money. What
remains? A successful territorial expansion, an economic boom with others
footing the bill in the end. I'm sure they can imagine worse outcomes.

------
jungletime
Is this related to the explosion in Lebanon?

~~~
me_me_me
How did you come to this question?

Turkey's Inflation and Lebanon Explosion.

------
seibelj
And some people say Bitcoin is a scam because no government backs it!
Yeeeeshhhhh

