Spotlight Turkey: Hyperinflation and Mass-Migration Crisis Inevitable

Turkey isn't close to hyperinflation yet. But the path it's on is a guaranteed way to get there.

As Erdogan tightens his grip on finance and the central bank, Investors Fear Turkish Currency Crisis.

The Turkish lira fell around 4% against the dollar late Monday after Mr. Erdogan appointed his son-in-law as finance minister and put in place measures that could curb the independence of the country’s central bank. Investors also sold Turkish shares and debt, with yields on its dollar bond maturing in October 2028 rising from around 6.8% last week to about 7.15% recently, according to Tradeweb. Yields rise as prices fall.

“There’s a real risk that this spirals into a full-blown currency crisis,” said Paul McNamara, a portfolio manager at GAM Holding . “It’s got so many red flags that we’ve associated with economic crises…in the past.”

In such a crisis, a sharp slide in a currency threatens the government and local companies’ ability to pay foreign debt. Turkey has one of the highest levels of external debt for a developing country, at 53.4% of gross domestic product, according to data from the International Monetary Fund. Local companies have raised billions of dollars, leaving them and the wider economy vulnerable to a slide in the lira, which would make paying off that debt more expensive.

The lira has lost a fifth of its value this year as investors sold ahead of Mr. Erdogan’s June re-election, concerned he would erode the central bank’s independence and usher in looser monetary and fiscal policies. Mr. Erdogan has described high interest rates as “the mother and father of all evils,” stoking fears that his preference for lower rates could prevent the central bank from supporting the currency and tackling inflationary pressure.

Mr. Erdogan fanned those fears on Monday. After taking the oath of office for a new five-year term, the government issued a decree that stipulated that the president would appoint the central bank governor, deputies and monetary policy committee members for four-year mandates.

Just a Start

Al-Monitor reports Erdogan Son-in-Law Takes Finance Ministry Post with Promises, Hush Orders

Just when you thought he couldn’t get any more audacious, Turkey’s President Recep Tayyip Erdogan put his son-in-law in charge of the country’s finances and issued new decrees that will radically reshape the way the country is run within hours of being sworn in on July 9 for a second term.

An emergency decree scrapping a five-year term limit on the Central Bank governor issued prior to Erdogan’s inauguration had already signaled his determination to continue to meddle in the bank’s affairs. A new decree announced on June 10 allows the president to appoint the Central Bank governor and his deputies along with the body’s monetary policy committee for a period of four years.

One of Albayrak’s first moves, was apparently to secure the censoring of several tweets by Turkish journalist Pelin Unker of the opposition daily Cumhuriyet.

Pressure on Turkey’s beleaguered media is unlikely to ease. The Press and Information Directorate, which issued press credentials to Turkish and foreign reporters, has been abolished and its authority transferred directly to the president.

Hyperinflation, a Political Event

Hyperinflation is primarily a political event, not a monetary one. More accurately, the first leads to the second, not the other way around.

Studies

• Weimar Germany: Demands for war reparations following WWI set in motion finances that could not be repaid. Germany turned to the printing press.
• Zimbabwe: Prime Minister, Robert Mugabe confiscated land to give to the people. The result was white flight and capital flight. The country collapsed as did the currency.
• Venezuela: To fight poverty, presidents Hugo Chávez and Nicolás Maduro took over the oil industry and gave cheap gasoline to the people. In US dollar terms, gasoline is now a penny a liter. But you will not find any at that price.

Turkey on Venezuela's Path

1. Erdogan jailed political opponents
2. Parliament effectively made Erdogan prime minister for life
3. Erdogan took over the press
4. Erdogan took over the courts
5. Erdogan took over finance
6. Erdogan about to take over the central bank

Hyperinflation Nearly Inevitable

Venezuela did not hop straight into hyperinflation and Turkey likely won't either.

However, if Turkey remains on the same path, which seems highly likely, hyperinflation is the inevitable outcome.

Another Mass-Migration Crisis Coming

When hyperinflation or extreme enough inflation does happen, millions of Turkish citizens and refugees will flood into Greece.

The EU is not remotely prepared for such an event.