Get started
Get the app

Join millions of investors on Stash

Investing, simplified

Start today with as little as $5
Get the app
Money News

Let’s Talk Turkey’s Financial Crisis: What’s Happening?

August 15, 2018

  • The Turkish lira has fallen about 25% in a week
  • Turkey’s economic problems have sparked concerns for other emerging economies
  • Fears remain that Turkey’s problems could spark economic problems globally
3 min read

What does the value of Turkey’s money have to do with your money?

Something called the Turkish lira is in a free fall, and it’s causing problems for Turkey’s economy, as well as for other emerging markets.

The value of the lira lost about 25% of its value this week, and it has fallen about 40% since the beginning of 2018. And there are signs that it may drop even further, as investors have rushed to sell off their lira.

The fear, according to some market analysts, is that Turkey’s financial crisis could also spread to other emerging markets, and maybe the rest of the globe.

Some background on Turkey

The Turkish economy is saddled with large amounts of debt and is afflicted by unstable politics. Turkey’s leader, president Recep Tayyip Erdogan has taken on dictatorial powers in recent years, squelching an independent judiciary and imprisoning political opponents, among other things.

Erdogan and President Trump have also gotten into heated exchanges after the U.S. doubled tariffs on Turkish steel and aluminum imports in recent weeks. In response, Turkey has imposed its own tariffs on two dozen U.S. products, including agricultural goods, cars, and electronics.

What does it mean when a currency depreciates

When a currency depreciates, it means things get more expensive for the people who use it.

That’s because when the value of a currency falls, it can lead to inflation, which makes the cost of goods and services rise, according to experts. Inflation in Turkey is currently running at about 15% annually, which cuts into the value of what workers take home for pay. (For comparison, inflation in the U.S. runs at about 2% annually, and the value of the dollar has been growing in recent years.)

Similarly, a depreciating currency also makes it harder for a country to repay its debts, if those debts are held in foreign currencies. Turkey has more debt denominated in foreign currency than any other emerging market, according to reports.

When a currency falls in value, it also makes imports more expensive, as businesses must purchase foreign goods using a currency that’s worth less.

Markets and economies are interconnected

So when problems emerge in one country, they can often spread—particularly when the economies are large. The financial meltdown in the U.S. in 2008, for example, sparked financial problems globally.

The lira crisis has caused a sell-off in the U.S. and in western European markets.

What’s an emerging market?

Turkey seeks membership in the European Union, a federation of 28 countries that includes some of the wealthiest economies in the world, such as England, Germany, and France. Nonetheless, Turkey is considered an emerging market.

An emerging market refers to a country with a developing economy and growing business infrastructure.

The term is used primarily to describe nations with free markets and expanding global trade, but which may still have some governmental and institutional instability, and areas that are still primarily rural or underdeveloped.

Mexico, India and China are three other countries widely referred to as emerging markets, but there are dozens of other examples throughout the world.

Throughout 2017, emerging market stocks posted some of the strongest growth globally, posting double-digit gains as these economies have emerged from years of low or no growth, and as the global economy has also increased.

The trade wars set off by U.S. tariffs on goods produced in China and elsewhere, however, have stalled growth, according to some analysts.

“Escalation in trade tensions is hurting emerging markets the most,” Neena Mishra, head of ETF research at Zacks Investment Research told CNBC recently.

Turkey is a relatively small country, however, representing less than 1% of total holdings on the leading emerging market index, according to reports.

It might help investors in emerging markets to keep in mind that it’s not a good idea to try to time the market, and volatility is a part of investing.

Past currency crises

Currency crises happen with some regularity.

In 1997, something called the Asian financial crisis rattled global markets. The Asian crisis started with a meltdown of the Thai currency, called the baht. But it soon spread to neighboring countries, including Japan, China, and Russia and then western economies.

The currency crisis ultimately caused a 554-point sell-off on the Dow. At the time, that was its biggest single-day decrease.

The effects of the Asian financial crisis were felt for years afterwards.

Russia, similarly, in the late 1990s suffered its own currency crisis, as did Brazil.

By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

Next for you
Developed vs. Emerging Economy: What’s the Difference?

Investment Profile

Legal Cannabis Industry

Get all the details on investing in marijuana and the cannabis industry legally.

Learn more
Explore more articlesChoose a topic to learn more about
politics Careers Technology pop culture love and money

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Before investing, please carefully consider your willingness to take on risk and your financial ability to afford investment losses when deciding how much individual security exposure to have in your investment portfolio.

Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome. While the data and analysis Stash uses from third party sources is believed to be reliable, Stash does not guarantee the accuracy of such information. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. For more information please visit www.stashinvest.com/disclosures.