On Friday. World markets were down after Turkey roiled the markets. In the United States, the Dow, S&P, and Nasdaq fell by 0.78%, 0.70%, and 0.65% respectively while in Europe, the Stoxx, DAX, FTSE, and CAC lost 2.05%, 2%, 0.97%, and 1.60% respectively. Today, futures point to a lower open by the major markets in Europe and the United States.
The Turkey situation started a few years ago. In 2016, when the Turkish president was abroad, a team of military officials decided to overthrow him. In response, millions of Turks went to the streets to protect their democracy. Within a few hours, the military leaders who had initiated the coup had lost it.
The failed military coup strengthened the Turkish president, Recep Erdogan. A few months later, he called for a referendum, to give himself more power. This move was condemned by the West, who said that he was become an authoritarian (which he is). This led to major tensions between the Western leaders, Turkey had courted for years. He also arrested thousands of people, including scholars, military officials, and ordinary citizens who were accused of orchestrating the coup.
This year, the country went to an election. One of his main pledges was to take more role in making monetary policy decisions. His problem with the central bank was that it was raising interest rates and so, his involvement would prevent the bank from doing this. A lose monetary policy leads to a higher inflation rate. Recently, the central bank released forecasts that said the rate of inflation would reach 15% but the bank refused to raise rates. This led the Turkish currency to tank.
The problem continued last week when the United States announced new sanctions and tariffs on Turkey. This was in response to the continued arrest of an American pastor. The new tariffs will affect the steel and aluminium industry.
Therefore, Turkey has three solutions to save its economy. First, it should negotiate with the United States. In the past, Trump has expressed his admiration for Erdogan, who he has met twice during the NATO meetings. Second, the country should allow the central bank to be independent. Around the world, politicians always keep away from the central bank issues. Third, the country should consider going to the IMF for an aid package, the same way Argentina did a few months ago. For the IMF to get involved, the third part must be met.
For traders, the Turkish crisis presents an opportunity. The reality is that on a global scale, Turkey is a relatively small economy. It has a GDP of $857 billion making it the 18th largest economy in the world. If it was an American state, it would have been the fifth after California, Texas, New York, and Florida. Therefore, the slump in the world markets has seen markets run to stocks that were greatly affected with the panic. This is because in this week, there is a likelihood that they will recover.