Question: The Turkish Lira plunged by 14% in a single day on August 10, 2018, following a continuous decline of more than 21% since the beginning of this year. The drop was exacerbated by America's imposition of customs duties on steel and aluminum imported from Turkey, as well as the highlighting of the issue regarding the detention of the American pastor in Turkey since 2016 and the demand for his release. What are the reasons for all of this? Furthermore, where is this crisis headed? May Allah reward you with goodness.
Answer: To clarify the answer, it is necessary to reflect on the following matters:
First: The Lira crisis and its continuous fall over various periods:
The Lira began its operation in 1927 at a rate nearly equal to one dollar, following the destruction of the Khilafah and its currency based on gold and silver. The story of the Lira’s decline then began in 1933, when the dollar became equal to two Liras. After that, the series of devaluations accelerated until the dollar reached 1.65 million Liras in 2001. The deficit in the Turkish economy reached its peak under pressure from the International Monetary Fund, and the government of the pro-British Ecevit began to stagger. Consequently, elections were held in 2002, which Erdogan and his party won, forming the government with American support. His government took a decision to remove six zeros, which the parliament approved and began implementing on January 1, 2005, making the dollar equal to 1.79 Liras. However, this did not remain stable for long; since 2013, the Lira began to fall again. It recorded a significant drop over nine months until the beginning of 2014, losing 30% of its value, and it has not stopped to this day. Erdogan’s government tried to limit the fall and maintain stability but was unable to do so. The Lira began to fall significantly since the beginning of this year, losing about 21% of its value against the dollar by mid-2018—within just six months.
After that, on July 26 of this year, the crisis surfaced dramatically when Trump and his deputy, Mike Pence, threatened to impose sanctions on Turkey if Brunson was not released immediately. The Lira then began to fall further at the end of last July against the dollar, reaching 4.91 Liras compared to 4.76 Liras before the decision of the Central Bank of Turkey to keep the usurious interest rate at 17.75% without increase. (The Turkish Central Bank kept interest rates unchanged on Tuesday, defying expectations of a hike after inflation rose to its highest level in 14 years. The bank kept the one-week repo rate at 17.75%. The Lira, which has lost about 20% of its value since the start of the year, fell to 4.91 against the dollar after the decision from 4.7605 immediately before it. Source: Sky News Arabic - Tuesday, July 24, 2018).
Following that was the announcement of the sanctions decision in a tweet by Trump on Twitter, which accelerated the Turkish Lira's fall against the dollar. To contain the crisis with Washington, Ankara hurried to send a delegation headed by the Turkish Deputy Foreign Minister on August 7 to negotiate with his American counterpart to discuss the crisis of Pastor Brunson. However, the negotiations between the two parties did not reach a result. No sooner had the Turkish delegation started its return trip home on August 9, than Trump poured oil on the fire in a tweet on his Twitter account on Friday, August 10, by increasing tariffs on steel and aluminum imports from Turkey—making the import duties on aluminum 20 percent and steel 50 percent. This pushed the Lira to fall again, reaching a new record low of 7.24 Liras to the dollar in early trading in the Asia-Pacific. The Turkish currency has lost about 40 percent of its value since the beginning of the year; during the second week of August alone, the Lira lost the equivalent of 20 percent of its value against the dollar. (Trump added: "I have just authorized a doubling of Tariffs on Steel and Aluminum..." 10/08/2018 arabi21.com)
Thus, the financial crisis between America and Turkey appears on the surface to be a result of the Pastor Brunson case and the American President’s desire to satisfy the fundamentalist Christian segment of his electoral base just a few months before the midterm Congressional elections. However, the truth is that the Pastor Brunson case was used as a cover for the real reasons behind the collapse of the Turkish Lira, which is a political crisis fueled by the United States to strike at Europe, as we will demonstrate. This is because the signs of the crisis existed even before the dispute between the Turks and Americans, and the Turkish government brought forward the election date from November 2019 to June of this year to preempt any worsening of the crisis that might affect the election results. Erdogan himself admitted this, saying: "Thanks to moving up the election date, we will prepare for the effects of a devastating economic earthquake; otherwise, we will not be able to emerge from this period without incurring losses." (Turkish News Page, 20/04/2018). Meaning, the deterioration of the Lira’s value happened before the issue of the pastor and before the raising of tariffs. Particularly, since Brunson has been imprisoned since 2016, it makes no sense for America to resort to imposing sanctions on Turkey at this time for Brunson, especially when the extent of the United States' lack of concern for religion and human rights is well known.
As for the real reasons behind the rapid decline of the Turkish currency, it is due to a set of factors, the most prominent of which are:
a- The large volume of borrowing, especially by the private sector, during the last ten years. In September 2017, the Turkish Treasury announced that Turkey's total external debt had reached $438 billion, and that it planned to pay about $11 billion to service the debt amounting to about $43 billion during 2018. The Turkish Treasury stated in a report issued on 31/10/2017 that it ("plans to pay $10.92 billion as part of the amount reaching nearly $43.1 billion for debt service in 2018... and inflation rates recently reached higher than 10%." Anadolu Agency, 31/10/2017). Thus, the alarm bells began to ring loudly, until the Turkish Treasury Undersecretariat recently announced that ("the total external debt on Turkey for the first quarter of the year as of 31/03/2018 is $466.1 billion." Anadolu Agency, 29/06/2018). It must be noted here that a significant part of these debts originally belongs to government projects, but the private sector took over their implementation and financing. This is because President Erdogan's government, during the last ten years, tried to reduce government debt by offering these projects to the private sector, which borrows from abroad to implement them. Therefore, the private sector today bears part of these debts, which is a political trick so that the government can always boast about its low external debt!
b- The trade deficit between exports and imports increased by 37.5% compared to the previous year, reaching $77.06 billion during 2017, as shown by data from the Turkish Ministry of Customs and Trade on 02/01/2018. These are paid in hard currencies. The value of Turkish exports was $157.1 billion while imports were $234 billion + 156 million US dollars for the year 2017 (Turkish TV and Radio, 02/01/2018). In addition, the inflation rate announced in Turkey by official figures from the Turkish Statistical Institute on 03/08/2018 regarding the inflation rate in the country reached 15.85% (Anadolu Agency, 03/08/2018). This is the first time it has risen to this extent since 2003 when Erdogan’s party came to power, noting that the Central Bank's goal was to make the inflation rate 5% to reach European standards. However, it failed; it could not achieve this percentage, stopping at 8%, but it quickly rose to 10% last year to reach today's figure of about 16%.
c- Rating agencies downgrading Turkey's economic status, which put pressure on the Turkish Lira and weakened confidence in it and the Turkish economy. The rating agency Moody's warned on 14/04/2018 of the weakness of the Turkish currency and the inflation of Turkish indebtedness, saying: "The chronic weakness in the Turkish currency has a negative impact on its sovereign debt rating and is problematic for the economy," pointing to "the low foreign exchange reserves in Turkey" (Reuters, 14/04/2018). This agency "lowered its rating for Turkey from (Ba1) to (Ba2) on 13/03/2018." Erdogan reacted angrily, saying: "Credit rating agencies are busy seeking to push Turkey into a corner and financial markets should not take them seriously" (Turk Press, 13/03/2018). It was followed by the Standard & Poor's credit rating agency, which lowered Turkey's rating on 02/05/2018 in an unexpected move. This agency announced its decision to lower Turkey's rating from (BB) to (BB-). The agency said: ("The downgrade is due to our concerns regarding the deterioration of inflation prospects and the long-term decline and volatility in the Turkish currency exchange rate." Reuters, 02/05/2018). They were followed by the Fitch credit rating agency, which said in its statement: ("Turkey's credit rating fell from 'BB+' to 'BB' due to increased inflation, the current account deficit, and uncertainty in Turkish economic policy." Turk Press, 14/07/2018). It is known that these credit rating agencies play a role in influencing the economic situation, as they hide economic problems of a country and do not highlight them, as they did with Turkey for many years, or they lift the veil and exaggerate them as they are doing with Turkey now to serve political purposes. This makes creditors apprehensive about lending to Turkey and then demanding their debts—which increases the demand for hard currencies from the market to repay debts, causing the Lira to fall.
Second: Here we must ask: since the Lira crisis existed for some time, why pressure it at this specific time with the pastor crisis and the raising of tariffs? And then highlight the fall of the Lira in this accelerated manner as if it were a tension between Turkey and America to strike the Lira? This is a dangerous matter, like a declaration of war, which should at least necessitate cutting ties or withdrawing from NATO, etc., yet none of this happened! So, what is the reality of the matter then? To clarify the truth, we mention the following:
The Trump administration has always adopted a discourse of a strong dollar against major global currencies, especially the Euro. It exploited the low interest rates in the Eurozone and raised its own interest rates to drive capital to migrate from Europe to America to obtain higher interest. America expected that the transfer of funds would lower the Euro against the dollar, but the result was not as they wanted. Instead, the Euro continued to rise relative to the dollar because the European Central Bank began effective plans to tighten its monetary policy and reduce or stop the purchase of bonds in what is called monetary easing, which led to the transfer of capital from the United States to Europe and Asia in search of better returns on investments. When Trump failed in this, he resorted to reducing imports and increasing exports to adjust the trade balance in his favor to strengthen the dollar. He began by imposing tariffs on certain imported goods (and for that reason, the US Commerce Secretary Wilbur Ross announced on Thursday, May 31, 2018, that his country would impose high customs duties the following Friday on steel and aluminum imported from the European Union, China, Mexico, and Canada. 31/05/2018 www.dw.com).
However, all these policies did not achieve the strengthening of the dollar against the Euro for Trump. It seems that he found what he was looking for in highlighting the fall of the Turkish Lira by putting more pressure on it, and then striking the financial market in Europe by causing panic due to the intensity of financial relations between Europe and Turkey. Most investments in Turkey are European; they increased in 2017 by 42%. Turkey’s largest trade exchange is with Europe, reaching $160 billion in 2017, favoring the latter. The two parties began updating the Customs Union agreement signed in 1995 with the goal of raising trade exchange to $200 billion within a year and a half, and to $500 billion within five years, as announced by Turkish Economy Minister Nihat Zeybekci (Al-Sharq Al-Awsat, 29/09/2017). Meanwhile, the volume of trade exchange between Turkey and America is $18.7 billion, with US exports to Turkey increasing by 7.2% during 11 months of Trump’s era (Anadolu Agency, 21/01/2018). Therefore, any shock to the Turkish economy and subsequently the Turkish Lira will stir strong panic in Europe's economy. This financial panic, as Trump expects, will deal a near-fatal blow to the Euro.
The European market has indeed been affected by the fall of the Turkish Lira:
a- The European Central Bank is feeling increasingly concerned about the exposure of Eurozone banks to Turkey, especially the French bank BNP Paribas, the Spanish bank BBVA, and the Italian bank UniCredit. These three banks have major operations in Turkey, and their shares fell by about 3%. Europe has become affected by what is happening in Turkey because of its investments there, the debts owed by Turkey, and the volume of trade exchange between the two parties.
b- (According to the latest figures from the Bank for International Settlements, the debts of European banks due from Turkey reach $224 billion (about 200 billion Euros), most of which are to Spanish banks. These banks fear their exposure to a crisis in Turkey, and the shares of some of those European banks began to fall with the collapse of the Lira by percentages ranging between 10 and 20 percent because of their debts in Turkey) Sky News, 31/05/2018.
c- There is another worrying aspect of Turkish debt, which is the inability to service the debt. Turkish investors owe Spanish banks $82.3 billion, and French banks $38.4 billion, while the value of Italian loans is $17 billion in a mix of local and foreign currencies. From here, the alarms go off in Europe; the Spanish bank BBVA, the Italian UniCredit, and the French company BNP Paribas have lost share value: https://www.ft.com/content/51311230-9be7-11e8-9702-5946bae86e6d
As the fall in the Lira's value also raises the possibility of Turkey defaulting on its loans, it leads to Europe being affected on a wide scale.
d- Reports indicated that large Turkish companies, owing more than $220 billion, filed requests to the government for protection from creditors after the Lira's fall. Among these companies is the Dogus Group, managed by billionaire Ferit Sahenk, who asked banks to restructure foreign currency debts worth billions of dollars. Some estimates mentioned that the total amount of debt he is asking to restructure is about $20 billion.
e- The Association of German Chambers of Industry and Commerce announced that about 6,500 German companies inside Turkey were affected by the state of uncertainty overshadowing the Turkish economy, noting that German companies have begun to reconsider injecting new investments into the Turkish market. 13/08/2018 www.lebanon24.com.
**Third: Thus, the focus on the Lira crisis with this rapid decline as a result of America's measures was to create a severe shock in the European economy and then strike the Euro and its decline against the dollar. Although American measures by pressuring the Lira will affect people's lives in Turkey, Trump does not care about this. While one can understand Trump's arrogance in striking any currency that competes with the dollar according to the cowboy mentality that flows in his blood, what is strange is that Erdogan does not realize this; he is surprised by what Trump did and wonders how Trump could do that to his ally for the sake of a pastor! He said before a gathering in the city of Ünye overlooking the Black Sea: ("It is wrong to dare and try to subject Turkey through threats for the sake of a pastor," and added, "I address those in America again: Shame on you. You are replacing your strategic partner in the Atlantic Alliance for a pastor." Source: Al-Anba website, Sunday, 12/08/2018). Furthermore, he says, addressing Trump with plea and sadness, that Turkey has provided many services to America and fought for its sake! In an article titled "How Turkey Sees the Crisis with the United States" published in the American New York Times on 11/08/2018, Erdogan says: ("Turkey and America have been strategic partners and allies in NATO for 60 years and they faced common difficulties in the Cold War period and beyond... Turkey rushed to help the United States at all times over the years... our forces fought with them in Korea... and in the darkest times of the missile crisis with Cuba, we contributed to calming the crisis by allowing the United States to deploy Jupiter missiles on our soil. Turkey sent its forces to Afghanistan to ensure the success of the NATO mission when America was waiting for its friends and allies to respond to those who carried out the September 11 terrorist attacks.") Thus, Erdogan shows his loyalty to America, the enemy of Islam and Muslims, and it rewards him with lack of appreciation!
Fourth: As for the fate of this crisis between America and Turkey and the problem of the Turkish Lira, what we expect is as follows:
Since the purpose of the American pressure on the Turkish Lira, which led to the rapid decline of the Lira, was to create panic in Europe to destabilize the European economy and thus the decline of the Euro due to the intensity of financial and economic relations between Europe and Turkey, and since this has indeed led to the decline of the Euro's value against the dollar: (...and the Euro was heavily damaged on Friday after the Financial Times quoted two sources saying that the European Central Bank is concerned about Spanish, Italian, and French banks and their exposure to Turkey. Today, the Euro touched $1.13655, which is the lowest level against the American currency since July 2017, meaning for more than a year... Source: Reuters - Monday, 13/08/2018). Therefore, if Trump achieves the striking of the Euro in a way that satisfies his arrogance, he may restore support for the Lira by reversing the scales of the rating institutions, just as he did when Erdogan came in 2003 when the Lira was low and the economy was turbulent in Ecevit’s time. He then created an economic growth bubble with consecutive loans under the influence of America and its aides and raised Turkey's rating... and then the promotion of the growing economy in Turkey began, although it was based on usurious loans and debts!
As for the effect of the tariffs, they are of no great consequence; Turkish steel exports to America are slightly more than a billion dollars (Youm7, 02/08/2018), which is not significant in a country whose exports in 2017 reached more than $157 billion (Al Sharq Portal, 02/01/2018). It is as if the intention was to create an atmosphere of instability in the Turkish economy and then a dark atmosphere over the Turkish Lira that would have an echo, or rather a ring, in the European economy and then the Euro, due to the intensity of economic and financial transactions between Turkey and Europe, and so it was.
As for the pastor, he has been detained for about two years and things were calm between Turkey and America. Now Trump has highlighted him for an electoral purpose, and also to create an atmosphere of tension between Turkey and America that helps in affecting the financial markets. He is a supporting element in this clamor and not the primary cause. Therefore, when he is satisfied with what happened to the Euro—which is expected not to last long—the pastor will be handed over to America while saving face for Erdogan, or even without saving it!
As for the suffering of the Turkish people as a result of the collapse of the Lira and the subsequent rise in prices and difficulty of living... this does not concern Trump, nor does it concern those who follow in his orbit, nor the agents. Perhaps these followers and partisans will take heed or realize that they have no weight or value to the masters if the interests of those masters require them to do to them whatever they wish, even if that involves humiliating those followers or blackening their faces. Indeed, he who finds humiliation easy to bear will find no pain in it.
The conclusion is:
The crisis created by Trump—from customs tariffs to the issue of the pastor, the downgrading of Turkey by rating agencies, the exposure of Turkey’s debts, etc., and the subsequent noticeable drop in the Lira—is intended to create panic in Europe to destabilize the European economy and cause the Euro to fall, due to the intensity of financial and economic relations between Europe and Turkey. This has indeed led to the decrease in the value of the Euro against the dollar.
Since Erdogan revolves in the orbit of America, it is not expected that the crisis will last long. Rather, if Trump is satisfied with the drop that occurred in the Euro, even if it was not the fatal blow he hoped for—and it seems this is not far off—then just as Trump started the crisis, he will end it with some face-saving for Erdogan or without it. Then the pastor will be released, tariffs will be canceled or reduced, and the rating agencies will return to adjust Turkey's grade after delaying the debt with new loans. Consequently, the Lira's price will improve, even if it does not return to what it was before the crisis, and Trump and Erdogan will return to friendly conversation as if nothing had happened! And so on... if the interests of their masters require their humiliation, they do it; indeed, if they require their removal, it happens. Such has happened to their predecessors before; will they not then take heed?
إِنَّ فِي ذَلِكَ لَذِكْرَى لِمَنْ كَانَ لَهُ قَلْبٌ أَوْ أَلْقَى السَّمْعَ وَهُوَ شَهِيدٌ
"Indeed in that is a reminder for whoever has a heart or who listens while he is present [in mind]." (Surah Qaf [50]: 37)
12th of Dhu al-Hijjah 1439 AH Corresponding to: 23/08/2018 CE