Turkey's lira crisis: How bad can it get?

Trump vows to double steel and aluminum tariffs on Turkey

President Donald Trump announced Friday that he plans to double steel and aluminum tariffs on Turkey - prompting the lira to plunge 20 percent - amid heightened tensions between the two North Atlantic Treaty Organisation allies.

Trump said Friday on Twitter that he authorized a new 20 percent tariff on aluminum and 50 percent tariff on steel from Turkey.

Germany's exporter-heavy DAX .GDAXI index fell 2 percent, underperforming the broader market, while Milan was the hardest-hit major European index and lost 2.5 percent, its lowest level since July previous year.

The new duties on Turkey are double the level Mr Trump imposed in March on steel and aluminium imports from a range of countries.

"If there is anyone who has dollars, euros or gold under their pillows, they should go exchange it for liras at our banks", he said Friday.

Earlier on Friday the lira plunged as much as 14 percent on as worries about Erdogan's influence over monetary policy and worsening US relations snowballed into a market panic that also hit shares of European banks. The president - instead of reassuring the markets, whose collapsing confidence is one of the main drivers behind the lira's unprecedented depreciation - slammed Western countries and accused them of waging economic warfare on Turkey.

The drop in the lira has put increasing pressure on Turkish banks, given many companies have borrowed heavily in foreign currency.

Turkey remains at loggerheads with the United States over the detention for the last two years of American pastor Andrew Brunson and a host of other issues. On 26 July, Trump and Vice President Mike Pence threatened sanctions if Brunson was not instantly released.

The decline has also hit European stocks today, with the Stoxx Europe 600 falling three per cent earlier on today.

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"It seems that the Erdogan administration may now have missed its chance to regain any central bank credibility and even when rates do rise, it is likely to be a case of too little too late".

After inconclusive talks this week on solving the spat, Mr Trump took advantage of Turkey's turmoil to turn the screws on the country. "Turkey will fight economic hitmen just as it fought the coup plotters". Turkey answered the March tariff announcement by placing its own tariffs on $267 million of USA goods.

It could impose capital controls on forex transfers or even call on the International Monetary Fund for bailout help, although economists regard the former an extreme measure with only marginal probability and the latter unlikely given one of Mr Erdogan's proudest achievements was paying off all of Turkey's International Monetary Fund debt in 2013. As recently as April the ratio was about four lira per dollar.

In the past, the Turkish authorities have always managed to contain problems by being willing to take aggressive action such as in January 2014, when the central bank hiked its overnight lending rate by 4pc at a midnight meeting.

Andrew Brunson has been in Turkish custody since 2016, when he was arrested on charges of terrorism and support of a group held responsible for an attempted coup of Turkish President Recep Tayyip Erdogan.

The lira weakened 20% to dollar after his tweet. Bookings to Turkey have gone up in recent months - although the exact cause is, of course, hard to say.

"You will not make money at the expense of Turkish people". Turkey's energy minister announced on August 8 that Turkey will keep buying liquid natural gas from Iran in violation of US sanctions.

Turkish President Recep Tayyip Erdogan and his newly appointed finance minister, Berat Albayrak, are due to speak at 2 p.m. local time Friday.

In June, the U.S. Senate passed a bill prohibiting Turkey from buying F-35 fighter jets because of Brunson's imprisonment and Turkey's purchase of Russia's S-400 air defense system.

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