Could Turkey collapse?

Monday, 13 August 2018
Melbourne, Australia
By Bernd Struben

  • Who are you calling Turkey?
  • When you can’t trust the banks…

The doomsayers are on the edge of their seats.

The Greek debt default in 2015 failed to deliver.

Brexit in 2016 was also a fizzer.

Nor did Donald Trump’s ascendancy to the White House in 2017 bring the global economic house of cards crashing down.

Now all eyes — in both the bull and bear camps — are fixed on Turkey.

Turkey has a population of more than 82 million people, according to UN estimates for 2018. And the World Bank put Turkey’s GDP at US$857.7 billion (AU$1.18 trillion) in 2016. That’s more than 340% larger than the Greek economy.

And Turkey is teetering. Though that didn’t stop Trump doubling steel tariffs on imports from Turkey to a whopping 50%.

Why?

To force Turkey to release US pastor Andrew Brunson.

Brunson’s been held in Turkey on dubious terrorist charges since 2016 relating to the attempted coup against Tayyip Erdogan. The US administration wants him released. But Erdogan has so far refused to buckle.

Now, as many of the world’s other leaders have come to realise, crossing Trump comes at a cost.

The US is Turkey’s largest market for its steel exports. And Trump’s announcement of the doubled tariffs sent the already battered lira tumbling 16%, pushing the nation closer to the brink.

More after the markets.

Markets

Over the weekend the Dow Jones Industrial Average closed down 196.09 points, or 0.77%.

The S&P 500 dropped 20.30 points, or 0.71%.

In Europe the Euro Stoxx 50 index finished down 67.85 points, or 1.94%. Meanwhile, the FTSE 100 fell 0.97%, and Germany’s DAX dropped 251.76 points, or 1.99%.

In Asian markets, Japan’s Nikkei 225 is down 422.56 points, or 1.90%. China’s CSI 300 is down 1.85%.

In Australia, the S&P/ASX 200 is down 27.59 points, or 0.44%.

On the commodities markets, West Texas Intermediate crude oil is US$67.72 per barrel. Brent crude is US$72.74 per barrel.

That’s almost unchanged since I penned Thursday’s Port Phillip Insider. Growing ructions with Iran could see a few price spikes in the weeks ahead. But the massive and growing supply out of the US should continue to put downward pressure on crude prices.

As you likely know, that’s mostly thanks to the shale boom, allowing US producers to extract oil from fields considered tapped out only a few years ago. That boom saw the US produce 11 million barrels of oil per day in June. A level that’s expected to keep growing.

And in a sign of just how vital US oil has become, China has opted out of slapping retaliatory tariffs on US crude imports.

From Bloomberg:

Less than two months after threatening to impose levies on imports of US crude, the world’s biggest oil buyer [China] has now spared the commodity…

‘“The US has been and will remain the main source of incremental crude production globally,” said Den Syahril, an analyst at industry consultant FGE. “With several new refineries starting up over the next couple of years, China would thus be wary of taking a decision that could end up severely hurting its domestic refining industry.”

Before the tariff kerfuffle, US crude exports to China had risen to 15 million barrels in June, the highest volume in data going back to 1996, according to US Census Bureau and Energy Information Administration data. That made the Asian country the biggest buyer of American supply.’

Did the Chinese just blink in their trade dispute with the US?

It certainly hints at an admission of weakness. I expect President Xi Jinping is looking for ways to settle the simmering conflict that allow him to save at least a modicum of face.

Mainstream analysts are predicting the US–China trade war is only just getting started. They may be right. But I believe Trump will want to put this one to bed before the 6 November mid-term elections. And Xi will be only too happy to oblige.

Turning to gold, the yellow metal is trading for US$1,209.00 (AU$1,662.77) per troy ounce. Silver is US$15.28 (AU$21.02) per troy ounce.

One bitcoin is worth US$6,323.66.

On the fiat currency markets, fears of an economic implosion in Turkey have driven a wall of money into the perceived safety of the US dollar, largely in the form of US government bond buying. This has seen most other currencies plummet against the dollar. Australia’s is no exception.

The Aussie dollar is worth 72.71 US cents. That’s down 2.1% since I wrote to you last Thursday.

Who are you calling Turkey?

Americans are a remarkably insular lot. It’s a sort of wilful ignorance of their international neighbours, driven by an inflated sense of national pride.

Anything that happens outside the US or involves non-American citizens is back page news in most Americans’ minds…even with Turkey making front page news in the financial papers.

In fact, I’d wager the majority of Americans couldn’t accurately place Turkey on a world map. Although these days most Americans have likely at least heard of Turkey.

Back in the 1970s, when I was a growing up in Virginia outside of Washington DC, that wasn’t the case.

One of my dad’s Turkish colleagues from the World Bank tried to call Istanbul from our house in Fairfax County one day. That was when all international calls still went through a human operator.

Here’s how that call went:

Dad’s colleague: ‘I’d like to place a call to Istanbul.’

Operator: ‘Where?’

Dad’s colleague: ‘Istanbul. I-S-T-A-N-B-U-L.’

Operator: ‘Honey, I don’t know what you’re talking about.’

Dad’s colleague: ‘I’m trying to call Istanbul, Turkey.’

Operator: ‘Who are you calling Turkey?!’ Breaks connection…

I share this true story with you for two reasons.

One, I hope it gives you a chuckle.

Two, it’s often the countries or corporate practices that have been flying under the radar for years which cause the biggest financial headaches.

And the headache from an imploding Turkish economy could spread well beyond its borders.

From The Australian:

The Turkish lira was already down more than 35 per cent for the year when it plummeted to record lows on Friday, surpassing the Argentine peso as the world’s worst-performing currency in 2018. That fall will not only create a Turkish balance of payments crisis, but could also hit European banks who have foolishly made big US-dollar loans to Turkey. Banks such as Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas are seen as being in the front line and their shares fell sharply at the weekend.

A potential banking crisis puts Europe’s major countries in the front line but unless the situation calms the crisis could quickly spread to emerging countries that have borrowed in US dollars…’

The reason emerging countries are at risk is due to the strengthening US dollar.

As mentioned above, investors are rushing into the safety of US bonds. This was enough to push the Aussie dollar down 2.1% over the past three days. Other emerging market currencies fared worse. Though none did so badly as the lira’s 16% single day plunge.

With more than half of Turkey’s AU$330 billion debt owed in US dollars, a tanking lira is going to make repaying that debt almost impossible.

While Erdogan turned to Allah for support, Turkey’s citizens may be better off looking to gold…and cryptocurrencies.

When you can’t trust the banks…

Much as we saw when Venezuela’s currency went into hyperinflation, demand for cryptos has soared in Turkey.

From CoinDesk:

Trading volume on Turkey’s cryptocurrency exchanges surged Friday as the country’s fiat currency plunged to record lows on economic jitters.

According to CoinMarketCap, volume at Turkish exchanges Paribu, Btcturk and Koinim jumped over the past 24 hours by more than 100 percent each…

The ongoing turmoil has increased the appeal of bitcoin and other cryptocurrencies for some local retail investors, even though the sector has been in a bear market this year.

‘“Every day there are new [bitcoin] exchanges coming up in Turkey,” said a local university student who for safety reasons asked to be referred to by his Twitter handle, Bit_gossip…

Similarly, Bunyamin Yavuz, a cardiologist in Ankara, said he no longer trusts local banks and now buys XRP, monero, lumens, among other cryptocurrencies as part of his investment portfolio.’

You can see the doubling of demand in the chart below:



chart image

Source: CoinDesk
Click to enlarge


The Turkish government may move to restrict access to crypto exchanges in a vain effort to support the lira. But this is a great vindication for the existence of an accessible crypto market.

Classic hedges against runaway inflation — precious metals, art, and real estate — are hard to come by in many corners of the world. Even here in Oz you can swap your dollars for bitcoin or XRP a lot faster than you can buy a bar of silver…or an apartment in Brisbane.

If the rush to cryptos in Turkey tells you anything, it’s that cryptocurrencies aren’t the flash in the pan its detractors claim.

Global volatility is only likely to increase over the next few years. And Turkey and Venezuela will be far from alone in facing economic collapse and an all-out rout of their currencies.

So it’s not just speculators, drug dealers and tax cheats that will keep the market alive.

It will be driven by those millions of people earning their paycheques in currencies that all but evaporate overnight.

To uncover the ins-and-outs of the crypto markets, you can join Sam Volkering and Ryan Dinse at their introductory service, Secret Crypto Network. More information here…

Questions, comments, feedback?

Send your letters to letters@portphillipinsider.com.au. If we publish your email, we’ll only use your first name.

Finally, here’s the latest out of the US from The Australian Tribune:

‘Trump’s Urgent Plea for Unity and Peace’

On the foreign stage, US President Donald Trump has been working hard to end long standing divisions between the US and its de facto enemies, like Russia and North Korea.

Back home, Trump is also working to end the increasingly divisive tactics of the far left and far right factions.

Trump says he condemns…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another, then The Australian Tribune is for you.

And it’s absolutely free.

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You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd