Israel Matzav

Sounding the alarm bells on the Turkish economy

Now I predict that Turkey's economic crisis will undermine the stability of the Turkish state as well, leaving the Muslim world without a single enclave of stability from the Libyan-Algerian border to China's Xinjiang province.

Encouraged by the central bank, Turkish banks increased their lending at a 40% annual rate in 2009 and 2010, financing a flood of imports. Turkey's trade deficit ballooned to a tenth of its total output - as bad as that of Greece or Portugal. And the country has been borrowing on short-term money markets to finance the import bubble.

Erdogan has the weirdest economic views of any serving head of government. He justified the credit bubble on religious grounds, pledging repeatedly to cut the "real" interest rate (the cost of interest minus the inflation rate) to zero.

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Turkey's currency has been falling for a year, and fell even faster in August and September. Turkey's central bank had no choice but to raise interest rates sharply last October to prevent it from entering free fall. Even with the sharp rise in interest rates, though, the currency has continued to deteriorate, and the Turkish stock market has continued to grind lower. But the spike in interest rates will have deadly effects on the domestic economy.

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The result is a vicious cycle: excess credit creation weakens the currency, forcing the central bank to put up interest rates; higher interest rates push up the cost of debt service for Turkish borrowers; Turkish banks lend more money to their customers to finance the higher interest costs, so that credit keeps expanding and the currency keeps weakening.

Turkish banks continue to increase lending at a 40% annual rate, but most of the new lending will finance interest payments on the old loans.

Labels: Turkish economy

posted by Carl in Jerusalem @ 10:39 AM