The plunging value of Turkey's currency, the lira, is rattling the world's financial markets.
Financial authorities in major economies must work together and calmly deal with this development to ensure the turmoil does not spread even further.
The trigger for the lira's fall was the announcement by the administration of U.S. President Donald Trump that tariffs on Turkish steel and aluminum would be increased due to Turkey's detention of an American pastor.
The intensifying dispute with the United States has increased uncertainty over the outlook for Turkey's economy, which pushed the lira's value against the U.S. dollar down by almost half since the end of 2017. Since then, there has been a lull in selling of the lira, but the embers of this problem are still smoldering.
The authoritarian political approach being consolidated by Turkish President Recep Tayyip Erdogan underlies the worsening situation. Erdogan's comments indicating an increasingly anti-U.S. stance and belittling Turkey's alliance with Europe and the United States have dented investor confidence.
Inappropriate economic management also has been a factor making matters worse. Raising interest rates is one effective policy to stave off a currency's slide. Argentina has raised its interest rates as an emergency step after a plunge in the value of its currency, the peso.
However, Erdogan abhors interest rate hikes and also has shown a willingness to intervene in the Turkish central bank's policies. His handling of the matter is difficult to understand.
Turkey should quickly increase interest rates and implement other measures to protect its currency.
Monitor capital flows
The declining value of the lira will deliver body blows to Turkey's economy, such as through inflation fueled by higher prices of imported goods. It also will inflate Turkey's burden of debt repayments denominated in foreign currencies.
European banks, in particular, have extended massive loans to Turkey.
There is a growing view that if these loans to Turkey become unrecoverable, it could lead to a worldwide financial crisis originating in Europe. This appeared to temporarily spark a global selloff of shares.
Although the risk of Turkey defaulting on its debts seems low for now, it cannot afford to be careless. It is essential to make efforts to forestall a financial crisis.
There is a view that the repercussions of the weaker lira will cause the yen to strengthen, and this could weigh down Japan's economy. Turkey should wake up to the fact that the declining value of the lira is becoming a destabilizing factor in the global economy.
As capital pours into the United States, which continues to hike interest rates, emerging economies find themselves in a situation where they are more vulnerable to currency depreciations.
Indeed, currency value declines have become evident especially in emerging economies with large amounts of foreign debt. It has been pointed out this could slam the brakes on economic growth in these economies and even exert downward pressure on the global economy.
A situation that plunges the world's economy into turmoil, as the Asian currency crisis in the latter half of the 1990s did, must be avoided -- whatever it takes.
Financial authorities in each economy should bolster monitoring to watch for any drastic shifts of funds from emerging economies. In preparation for a sudden emergency, they also need to review their procedures for supplying sufficient funds to the markets.
(From The Yomiuri Shimbun, Aug. 16, 2018)
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