There are two types of countries in the world. Countries that have current account surpluses and countries that have current account deficits. The former lend money to the latter.
Both and Turkey and the States are in the second category. But Turkey has periodic currency crises, as happened in 2001 and is happening again this week, while the US looks safe. Much of it is because Turks are not able to borrow money in Turkish liras, while the Americans borrow in their own currency. When Turks borrow in dollars and their currency devalues, they have to pay more. This should not be news to anyone. The advantages of having the global reserve currency is referred to as “exorbitant privilege,” a term first used by the French in the 1960s, at the dawn of the Bretton Woods system.
Turks are learning about that now. During the past 15 years, Turkey grew quickly, but ran up a considerable debt. As a bureaucrat in 2001, I had the dubious privilege of observing the currency crisis from a front seat. This week was quite the deja vu. The events unfolding look familiar, yet the situation is quite different. I see three major differences this time around.
First, the problem in 2001 was the foreign exchange denominated government debt. This time around, it is foreign exchange denominated corporate debt. Mind you, it is easier to restructure government debt than it is to restructure corporate debt.
Second, back in 2001, the global economy was not going through quantitative tightening, with US dollars in emerging markets returning to home assets. Quantitative easing went hand in hand with corporate leveraging in countries like Turkey. Now, with tightening, the time has come for corporate deleveraging.
Third, back in 2001, Turkey and US had better relations than they do at the moment. Turkey’s accession process to the EU had gained momentum with Washington’s strong support. The political situation today is entirely different, with both presidents eyeing electoral wins by playing the “civilizational” Christians vs. Muslims card.
But the presidents are of course unevenly matched. In 1971, Nixon’s treasury secretary John Connally infamously told his G-10 counterparts “the dollar is our currency, but it’s your problem”. The Turkish economy today is at the mercy of its superpower ally. Trump has attacked Trudeau, Merkel, Macron and others, now Erdoğan is on his target. Maybe Trump wants to beat up a tough leader and make an example of him. “This is what happens to you if you mess with the Donald. Go tell all your friends!”
As satisfying as it might be to some, exporting this gangster attitude to the stage of international relations is going to have serious consequences. The Turkish economy was going to go into crisis for several reasons, but none of it matters now. This currency crisis, which could have severe effects on the country’s people, will be remembered as having been caused by the President of the United States. We will revert from constructive self-criticism and define ourselves through our enmities. I believe that this is how very bad things happen.
This commentary was published in Hürriyet Daily News on 18.08.2018
