Turkey crisis could spread to other emerging markets, Europe

Burhan
Ozbilici/AP

• Global markets have stabilized after initial fears that
  Turkey’s crisis would spread to other emerging economies or
  even Europe — but that does mean the danger is
  over. 
• Turkey plays a key geopolitical role as a NATO member
  that makes any threats to its stability even more important to
  its neighbors.
• Investors fear the crisis could spread to other
  vulnerable emerging states like South Africa and Argentina,
  while some European banks hold substantial exposure to Turkish
  assets.

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Turkey’s deepening currency run, which some analysts worry
may soon morph into a debt repayments crisis, has a good chance
of affecting other key markets around the world for one key
reason: the country’s political importance to the power struggle
between the European Union and Russia is even greater than its
economic might.

“Although Turkey is considered an emerging market economy,
it’s still a NATO ally and some reports say that we have close to
50 nuclear weapons stored on their soil,” said Chris Zacarelli,
chief investment officer at Independent Investor Alliance, in a
statement to reporters.

He added that Turkey had been moving away from the US
politically, and had made overtures to Russia, China and
Iran. 

“Since there doesn’t appear to be signs of contagion at
this point – although Spanish, French and Italian banks are owed
close to $140 billion by Turkish borrowers – it doesn’t seem like
there is much to worry about, but these things can turn on a
dime.”

For Alistair George at  Edison Investments, Turkey
serves as an “
example of the effects of
tighter US dollar funding conditions in combination with
adverse geopolitical developments.”

“Separated from the political angle, a Western-style
refinancing and restructuring to resolve the excessively large
inflation and current account deficit problems would appear to be
a rational response to the problem,” he
writes in a blogpost.

“However, the antagonism between the Turkish administration
and the US makes this scenario look far-fetched at present. We
expect therefore the sense of crisis to persist until either the
pressure on the economy forces concessions from Turkey or details
of President Erdogan’s new alliances are forthcoming.”

That means more potential contagion both to other large
emerging markets that are current in fragile financial positions,
like
South Africa,
Argentina and
India, as well as into Europe via the exposure of Spanish and

Italian banks to Turkey.

The market consensus is that the Turkish government’s
response to the crisis thus far has been way too timid.

“
Investors need to see serious economic
measures and not political ones to prevent things getting
completely out of control,” said Hussein Sayed, chief market
strategist at FXTM. “This includes an emergency interest rate
hike by the central bank, imposing capital controls, fiscal
reforms, securing a rescue package by the IMF or other lenders
and ending the current diplomatic fight with Donald Trump. Until
such steps are taken, investors will continue to selloff Turkish
assets.”

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