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Comment by brad0 | Hacker News Reader

I've been hearing about the USD causing issues with economies such as Turkey recently from several sources.

As far as I can tell it's because a lot of loans in Turkey were backed by USD. Now that the USD is a lot stronger it's causing loan defaults in Turkey.

Can someone chime in who has a better understanding of the current situation? It sounds really interesting and complex.

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Turkey has an overheated economy. It's growth has outpaced its productive capabilities. Lot of people are painting this to be primarily Erdogans fault. That is far from true. Turkeys growth is due to the combination of foreign denominated investments and loans in both domestic and foreign currencies. The Turkish Central Bank has been surpassing interest rates despite high inflation rates to keep the credit flowing. Altogether, the economy is over-levereged and it was going through a corrective cycle from January. Normal, and healthy.

That being said, multiple geo-political situations have now pushed this correction into what is likely a recession. First, there is the situation in Syria. Aside from the domestic strains and frictions, this situation puts Turkey at odds with Russia and Iran. Second, after a failed coup attempt a paranoid and defensive Erdogan has consolidated power -- this can only increase uncertainty and risk. Finally -- the straw that broke the camels back -- the recent economic policies of US towards Turkey. Tariffs, threats, and likely more (according to the administration). This led to a sell-off of the lira against the dollar and euro. This has systemic effects as it increase the cost to finance any foreign denominated debt. What that means is that all Turkish businesses need to increase costs in order to maintain present profitability levels. Without foreign intervention -- or very good diplomacy by Turkey and EU -- this is likely beginning of a recession.

I strongly disagree with your portrayal of Turkey’s problems as not being in large part stemming from Erdoğan and his rule.

He has hollowed out the government and banking institutions of capable and educated, in favour of political functionaries, conspiracy peddlers, and other unqualified individuals.

https://foreignpolicy.com/2018/08/22/how-turkey-dumbed-itsel...

Not an expert of the current situation. But the Asian Financial Crisis in 1998 was caused by something similar.

In that case, people were borrowing in USD due to much lower interest rates in USD and stable/fixed exchange rates. These loans were used to finance property and infrastructure for exports. However, these loans were also financing lots of purchases for imports, so the current account deficit in these countries got worse and worse, until inflation happened and debt payments shot up, causing firms to default and creating an economic collapse.

As a result, Indonesia, Thailand, and South Korea had to get help from the IMF. http://www.wright.edu/~tdung/asiancrisis-hill.htm

It's not quite as simple as it just being the USD's strength. In Turkey's case, they are highly leveraged and have probably spent above their means for the last decade whilst growth was also healthy. Now growth is so so, the USD is getting stronger making the debt ratio worse, there is relatively high inflation and consequently the loan markets are becoming tight for Turkey as people are becoming wary about repayments..

Edit: Erdogan's (Turkey's prime minister) strongman attitude, a perceived power grab as well as attack on independent journalism might be contributing too.

That's right. The situation is quite complex with foreign debts that are hard to pay back. The situation gets worse with tariffs against Turkey hurting their ability to trade, which creates caution among investors. This in turn causes less demand for their currency, which makes things worse.

Econofact has some background and history that I found quite interesting and well explained:

https://econofact.org/the-financial-and-economic-crisis-in-t...

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