Hold Me Tender

Image source: Annie Spratt @anniespratt - Unsplash Faraways - Shutterstock

What's going on?

The Turkish lira plunged to a near-record low on Monday after the government fired the chief of the countrys central bank over the weekend.

What does this mean?

The prices of goods and services have been rising rapidly in Turkey for a while now, with the countrys latest inflation rate sitting just above 15%. To fix that, the central banks chief has been hiking interest rates in an effort to discourage spending and cool off the countrys overheated economy. And even though that thinking is in line with almost all modern economic theories, the government disagrees: it says higher interest rates will actually lead to higher inflation.

So after another bigger-than-expected rate hike on Thursday, the Turkish government finally decided enough was enough: it replaced the central banks chief for the third time since 2019.

Why should I care?

For markets: This crash will be felt across Europe.

Any confidence investors mightve had in Turkey is all but gone: theyve been selling off the countrys bonds and stocks, and they sent the lira down 15% versus the US dollar. In fact, investors seem to think another currency crisis like the one in 2018, when the lira fell 34% against the dollar could be on the cards. And Turkeys not the only one feeling edgy: European banks like BBVA, UniCredit, and BNP Paribas might struggle to get repaid by their Turkish clients, and investors sent their stocks down by as much as 6%.

The bigger picture: Will emerging markets follow?

Turkey is considered an emerging market (EM), and what affects one often affects them all. That might be why other EM currencies fell in value during Turkeys 2018 currency crisis, and why there are concerns that history will repeat itself now. But thats not necessarily likely: 2018s crisis was at least in part down to globally significant US sanctions, while this time the governments actions were *looks up technical term* nuts.

Originally posted as part of the Finimize daily email.

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