When people in Turkey want to buy products from, say, the US, they can't do it with the Lira. They need to get convert their Lira to dollars before they make the transaction. They do this on the...
Exemplary
When people in Turkey want to buy products from, say, the US, they can't do it with the Lira. They need to get convert their Lira to dollars before they make the transaction. They do this on the foreign exchange.
Sovereign nations hold foreign currency reserves, and one of their purposes is to prop up forex rates. That is, the Turkish government has a bunch of dollars, and if it sees a trade imbalance (which will naturally lead to dollars being more desirable on forex, so it cost more lira to get a dollar), it will prop up the Lira by selling dollars for whatever value they want the Lira:Dollar to be.
Turkey has a lot of inflation. But, because the Turkish government is propping up the Lira, while the "value" domestically of the Lira is dropping, the "value" internationally is NOT dropping. So imports have been booming, of course.
What happens when the forex reserves run out? Well, the government can't prop up the exchange rate anymore, and it'll fall to its "true" market value. This will make imports very hard for Turkey. Additionally, foreign investors will likely pull out, as they fear the devaluation of Lira-denominated assets. Because the government borrowed much of its forex, it will also need to come up with the difference (or just default, but of course that hurts your credit), likely by selling domestic assets - now at a big discount, though.
At the same time, Turkish exports will be boosted, becauses Turkish goods will suddenly become dirt cheap.
So in hindsight, would it have been better for Turkey to not try to boost its foreign exchange rate and just have let it float all along? This would have reduced imports and boosted exports...
So in hindsight, would it have been better for Turkey to not try to boost its foreign exchange rate and just have let it float all along? This would have reduced imports and boosted exports gradually over time as the Lira value dropped, right?
It’s not like ransoms can really give good economic advice for an entire country, but actually tackling domestic inflation by raising interest rates instead of lowering them would have helped the...
It’s not like ransoms can really give good economic advice for an entire country, but actually tackling domestic inflation by raising interest rates instead of lowering them would have helped the root issues. If the trade imbalance, using your reserves to let the lira slowly float towards equilibrium also avoids the uncertainty and instability that a sudden price shock is going to have.
I am not an economist although I have lived in close proximity with one and read some of their books. I would love to hear from an expert if one is willing to contribute. However, running out of...
I am not an economist although I have lived in close proximity with one and read some of their books. I would love to hear from an expert if one is willing to contribute. However, running out of foreign exchange is a big deal that threatens Turkieye's participation in the world economy and the quality of life of its citizens.
The pieces of the article that I believe I learned something from are as follows.
Turkeye is on the edge of truly running out of usable foreign exchange reserves—and facing a choice between selling its gold, an avoidable default, or swallowing the bitter pill of a complete policy reversal and possibly an IMF program.
(adding this for context https://en.wikipedia.org/wiki/International_Monetary_Fund also as a condition for loans to struggling countries, the IMF frequently requires what it calls structural adjustment. https://en.wikipedia.org/wiki/Structural_adjustment)
Turkeye can no longer bridge the gap between its imports and exports by running down its reserves.
But Turkeye’s central bank has borrowed a ton of foreign exchange from Turkeye’s own banks and from other governments. It then spent its borrowed foreign exchange defending the lira. The result in some ways could be worse than a standard fiscal crisis. Turkey’s banks have lent so much to Turkey’s central bank (and on a smaller scale, directly to the government) that they cannot honor their domestic dollar deposits, should Turks ever ask for the funds back. (Turkish banks refusing or being unable to return dollars deposited by Turkish citizens because those dollars have been used for international trade could be a big political problem)
Seeing what happened to Greece during the 2010s IMF/ECB takeover, the troika, and the bailouts, I feel like this is by far the worst option for Turkey. I would not want them to suffer the same...
Seeing what happened to Greece during the 2010s IMF/ECB takeover, the troika, and the bailouts, I feel like this is by far the worst option for Turkey. I would not want them to suffer the same fate as we did in the previous decade. It was horrible and the conditions that we lived survived in often felt inhumane.
I am American and have no direct experience, but what I have read about IMF actions involving countries around the world leads me to believe that they are best avoided. The population suffers...
I am American and have no direct experience, but what I have read about IMF actions involving countries around the world leads me to believe that they are best avoided. The population suffers under the IMF typically from what I have seen and read.
Where does it leave Ergodan? He perhaps dropped his opposition to Sweden joining NATO in hope of a lifebelt from Europe, but he's just been reelected so presumably is fairly unassailable from...
could be a big political problem
Where does it leave Ergodan?
He perhaps dropped his opposition to Sweden joining NATO in hope of a lifebelt from Europe, but he's just been reelected so presumably is fairly unassailable from within. Or are there currents in Turkey which might blow him away?
I don't know whether there is any risk to his position. Some constitutions allow for what in the US we call an impeachment, some don't. The risk I think the article is pointing to is bank runs and...
I don't know whether there is any risk to his position. Some constitutions allow for what in the US we call an impeachment, some don't. The risk I think the article is pointing to is bank runs and whatever popular unrest that might lead to.
Is there anyone here who can explain this to a non-economist? The only thing I get from this are that things aren't looking great for Turkey.
When people in Turkey want to buy products from, say, the US, they can't do it with the Lira. They need to get convert their Lira to dollars before they make the transaction. They do this on the foreign exchange.
Sovereign nations hold foreign currency reserves, and one of their purposes is to prop up forex rates. That is, the Turkish government has a bunch of dollars, and if it sees a trade imbalance (which will naturally lead to dollars being more desirable on forex, so it cost more lira to get a dollar), it will prop up the Lira by selling dollars for whatever value they want the Lira:Dollar to be.
Turkey has a lot of inflation. But, because the Turkish government is propping up the Lira, while the "value" domestically of the Lira is dropping, the "value" internationally is NOT dropping. So imports have been booming, of course.
What happens when the forex reserves run out? Well, the government can't prop up the exchange rate anymore, and it'll fall to its "true" market value. This will make imports very hard for Turkey. Additionally, foreign investors will likely pull out, as they fear the devaluation of Lira-denominated assets. Because the government borrowed much of its forex, it will also need to come up with the difference (or just default, but of course that hurts your credit), likely by selling domestic assets - now at a big discount, though.
At the same time, Turkish exports will be boosted, becauses Turkish goods will suddenly become dirt cheap.
Good explanation!
So does that mean my vacation to Turkey becomes cheaper or more expensive?
Much cheaper, assuming you didn't pre-pay before the currency crashed.
So in hindsight, would it have been better for Turkey to not try to boost its foreign exchange rate and just have let it float all along? This would have reduced imports and boosted exports gradually over time as the Lira value dropped, right?
It’s not like ransoms can really give good economic advice for an entire country, but actually tackling domestic inflation by raising interest rates instead of lowering them would have helped the root issues. If the trade imbalance, using your reserves to let the lira slowly float towards equilibrium also avoids the uncertainty and instability that a sudden price shock is going to have.
I am not an economist although I have lived in close proximity with one and read some of their books. I would love to hear from an expert if one is willing to contribute. However, running out of foreign exchange is a big deal that threatens Turkieye's participation in the world economy and the quality of life of its citizens.
The pieces of the article that I believe I learned something from are as follows.
Turkeye is on the edge of truly running out of usable foreign exchange reserves—and facing a choice between selling its gold, an avoidable default, or swallowing the bitter pill of a complete policy reversal and possibly an IMF program.
(adding this for context https://en.wikipedia.org/wiki/International_Monetary_Fund also as a condition for loans to struggling countries, the IMF frequently requires what it calls structural adjustment. https://en.wikipedia.org/wiki/Structural_adjustment)
Turkeye can no longer bridge the gap between its imports and exports by running down its reserves.
But Turkeye’s central bank has borrowed a ton of foreign exchange from Turkeye’s own banks and from other governments. It then spent its borrowed foreign exchange defending the lira. The result in some ways could be worse than a standard fiscal crisis. Turkey’s banks have lent so much to Turkey’s central bank (and on a smaller scale, directly to the government) that they cannot honor their domestic dollar deposits, should Turks ever ask for the funds back. (Turkish banks refusing or being unable to return dollars deposited by Turkish citizens because those dollars have been used for international trade could be a big political problem)
Seeing what happened to Greece during the 2010s IMF/ECB takeover, the troika, and the bailouts, I feel like this is by far the worst option for Turkey. I would not want them to suffer the same fate as we did in the previous decade. It was horrible and the conditions that we
livedsurvived in often felt inhumane.I am American and have no direct experience, but what I have read about IMF actions involving countries around the world leads me to believe that they are best avoided. The population suffers under the IMF typically from what I have seen and read.
That makes sense. Cheers.
Where does it leave Ergodan?
He perhaps dropped his opposition to Sweden joining NATO in hope of a lifebelt from Europe, but he's just been reelected so presumably is fairly unassailable from within. Or are there currents in Turkey which might blow him away?
I don't know whether there is any risk to his position. Some constitutions allow for what in the US we call an impeachment, some don't. The risk I think the article is pointing to is bank runs and whatever popular unrest that might lead to.
Looks like the Wikipedia article might be a good jumping off point.
Ah! I didn't think there would be anything else covering this other than this article. Thanks :)