The Turkish Lira debacle: Are your Ataturks going to be worthless?

February 13, 2014

This person has obviously never been paid in lira

This person has obviously never been paid in Turkish liras!

There are sexier topics to cover — such as the recent restrictions of internet usage passed by the Turkish Parliament and the resultant protests — but I will focus this post on a topic that hits close to home for most of us living in and connected to Turkey: our dearly beloved lira and exchange rates!

Turkey has got into the news lately for its currency problems. At the time of writing, the Turkish Lira has traded at about 2.20 to 1 to the dollar and about 3 to 1 to the euro. The most recent devaluation started around the middle of December when corruption charges surfaced against members of Erdogan’s inner circle and those infamous images of shoeboxes full of stolen money were broadcasted into people’s homes.

My salary and that of thousands of English teachers are paid in lira. Some of my lira-earning friends and colleagues have had a “run for the hills” attitude, asking their bosses to pay in dollars, switching accounts to dollars, and even using this as a reason to leave the country altogether. Investor confidence in separation of central bank and political interests, as well as political stability overall, as gone down.

But that isn’t the whole story. Other macroeconomic factors are at play that explain why the lira has shriveled against the dollar. The Federal Reserve last year began a policy of tightening their money supply, buying fewer bonds in developing economies. This “tapering”, as it is known, means a stronger dollar and less foreign dollar cash reserves for developing economies like Turkey.

So, how bad is it? When I came to this country the lira was trading at around 1.6 to the dollar. In nearly 5 years time, that represents a devaluation of nearly 38 percent. While no one would see this as a good, strong performance over the past 5 years, it isn’t a bottomless pit drop that has citizens shopping with wheelbarrows of nearly worthless money. Compared to the old days, when in less than a lifetime a loaf of bread went from 1 to 1,000,000 lira, things seem comparatively stable.

Well, its not going to get this bad anytime soon.

Children stacking money during the 1920’s hyperinflation of the Weimar Republic. Well, its not going to get this bad anytime soon.

To stabilize the lira, the Turkish central bank raising interest rates a whopping four percent overnight in late January. Central banks raise interest rates to stop money from getting too cheap and causing inflation. However, as one column pointed out, this drastic rate rise can have the effect of causing inflation and slowing the economy — stagflation, if you remember that one from your Econ 101 class in college.

What will happen remains to be seen, but the Turkish government recently successfully issued a 30-year bond, managed by major brokerage firms such as Bank of America/Merrill Lynch,  a preliminary indicator that things are settling down and investors worldwide are still taking Turkey seriously. The exchange rate has responded, heading from a high of about 2.33 to about 2.18 as of Valentine’s Day.

I heart you, lira.

The ramifications for the us expats are that salaries drop, but for those with foreign currency hoping to buy property, it could be a boon. For regular folks like me considering buying a home in Istanbul, I suspect home prices could go down while interest rates could go up. There is already whispers of a mild housing bubble in Istanbul, and higher interest rates could incite this.

Shazam! Let the world know where you think things are headed.

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2 Responses to “The Turkish Lira debacle: Are your Ataturks going to be worthless?”

  1. Hardy said

    As someone who is directly affected by the lira’s rise and fall, I really appreciated this post!

    Just to add to the debate on interest rates — I think raising the interest rates will hurt the AKP in the medium term because this will slow home buying, leading to a downturn in the construction sector and that will hurt the Turkish economy overall (because the nation’s economy is overly dependent on the real estate sector), and this will slow home buying further… Even right now, there are a ton of houses in my neighborhood for sale with fewer and fewer people showing interest precisely because people don’t have the money anymore. So regarding the Roubini article you cite, I’d say he is a bit behind and the bubble here in Turkey is gradually bursting. Could get really interesting if housing and the economy slump right as we run out of water!

    Thanks again for the insightful analysis!

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