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Turkey lira crisis: Six things you need to know

A breakdown of the events, causes and effects, as Turkey's currency collapses amid a diplomatic row with the US.

Turkey lira crisis

Turkey is in the middle of a financial crisis with the collapse of its currency, lira, in recent days amid worsening relations with its NATO ally, the United States. 

Here are six things you should know:

What is happening to the Turkish lira?

The Turkish lira has lost more than 45 percent of its value this year.

The currency reached a fresh record low of 7.24 against the US dollar in Asia Pacific trading on Monday morning.

The lira recovered slightly on Tuesday, helped by the central bank's new liquidity measures and news of a planned conference call in which the finance minister would seek to reassure investors.

What's behind this?

This rapid slump came after US President Donald Trump announced a doubling of steel and aluminium tariffs on Turkey in a retaliatory move.

Washington has been pushing Ankara to release Evangelical Christian pastor Andrew Brunson, who is being held on terrorism charges.

Earlier this week, Erdogan ordered the assets of two US officials to be frozen in retaliation for sanctions imposed on Turkey's justice and interior ministers over the American pastor's detention.

Analysts say the financial crisis has been a long time coming and reflects Turkey's refusal to raise interest rates to curb double-digit inflation and cool an overheated economy.

The US disputes have also contributed to the lira's plunge.

Aly-Khan Satchu, a financial analyst and CEO of Rich Management, a financial and political advisory firm, said the economic crisis has taken place as the "US dollar has been weaponised - either deliberately or by design". 

"What we're seeing is the reduction of dollars being supplied into the system and the end of quantitative easing," he said in an interview from the Kenyan capital, Nairobi.

"When the global markets were flooded with cheap and free dollars, everybody got terribly excited, particularly across emerging and frontier markets, and now we have seen a whiplash turn here," Satchu added.

What does this mean for people in Turkey?

According to economic experts, in the short term, the lira's slide will increase inflation, which will hurt Turkey's poor.

Prices of goods are rising.

The Financial Times reported on July 27: "The Turkish bakers’ federation on Thursday announced a 15 percent increase in bread prices. The cost of an iPhone is up by a quarter."

Businesses are also concerned about higher import prices.

In June, Charles Robertson, chief global economist at Renaissance Capital, said that economic growth will be slow, "at best two to three percent this year. And the population is growing [at the rate of] one to two [percent], so per capita, that's really not much of a gain."

What steps have been taken?

In an effort to avert the crisis, the Turkish government has taken some measures over the last few days. 

On Monday, the central bank increased liquidity of its banking sector.

The industry ministry announced the activation of $1.2bn for the Turkish industrial production, along with some other measures taken by the finance ministry on Tuesday.

Turkey's President Recep Tayyip Erdogan, rejecting economic fundamentals as the cause of lira's weakness, has said that Turkey was the target of an economic war and has made repeated calls on Turks to sell their dollars and euros to shore up the national currency.

He has urged manufacturers not to rush to buy dollars.

On Tuesday, Erdogan announced his country would boycott US electronic goods.

How are international markets affected?

The weakness of the Turkish currency is starting to affect other emerging market economies.

On Monday, the Indian rupee suffered its worst one-day fall - at more than 1.5 percent - hitting a record low of 69.9 rupees to $1. The currency slightly recovered on Tuesday, before falling back again.

India's currency has fallen around nine percent this year, amid higher oil prices and a widening trade deficit.

The South African rand has also taken a hit this week as a result of the Turkish developments, falling 10 percent before stabilising on Monday - down to a two-year low against the dollar.

South Africa's central bank said it was not yet ready to intervene to support the currency.

Satchu, the financial analyst, believes the falling lira is just one factor hurting emerging markets, along with the reduction in the dollar supply.

"The repricing in Turkey has spilled over into other markets," he said.

What's expected to happen now?

Analysts have raised concerns of a wider contagion rippling through global markets.

Satchu said that Turkey would have to raise its interest rate by 750 points to bring the "situation under control". 

"It's a losing battle ... we are looking at a precipice right now," he said. "If he [Erdogan] refuses to raise the interest rates, the only thing that can give is the Turkish lira.

"We are looking at a scenario where the currency totally collapses, the inflation takes off and Turks will be wandering around with wheelbarrows of lira trying to buy a loaf of bread."

He added that the "dollar is basically knee-capping countries", before warning that others could be affected "if they continue to pursue the policies that Erdogan is seeking to pursue". 

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