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Why is the Turkish lira collapsing?

The Turkish currency collapsed nearly 20% Friday. In question: the tensions with the United States and the economic fragilities of the country.

"If you have dollars, euros or gold under your pillow, go to the banks to exchange them for Turkish lira. It's a national struggle , said On Friday, August 10, the Turkish President Recep Tayyip Erdogan, who keeps saying that a foreign "conspiracy" is responsible for the collapse of the Turkish lira, he once again called his fellow citizens to go to the foreign exchange bureaus. support their national currency . The tumble of the turkish lira is dizzying and now there is fear of a contagion to the financial markets. It actually plunged nearly 20% on the single day of Friday, a dollar exchanging briefly against 6.87 pounds, its lowest historic. Since the beginning of the year, it has lost 40% of its value.

The hemorrhage of the Turkish Lira has accelerated in recent days as a result of the serious diplomatic crisis with the United States, linked to the detention in Turkey of an American pastor. On Friday, US President Donald Trump announced a sharp increase in import taxes on Turkish steel and aluminum. These will increase from 25% and 10% respectively to 50% and 20%. "We will not lose this economic war," said Erdogan.

This escalation worries investors: they withdraw their money from Istanbul and Ankara, which further accentuates the fall of the Lira, already weakened by the weaknesses of the economy.

Turkey is undermined by major structural problems. Its banks are in poor conditions. The galloping inflation (16% in July annual rate) cuts the purchasing power of households. In recent years, the debt of Turkish companies has exploded: they have borrowed heavily in dollars, which makes them vulnerable to changes in exchange rates. "The country has a large current account deficit: it depends on foreign financing, especially in dollars," adds Christopher Dembik, an economist at Saxo Bank.

If the collapse of its currency continues, Turkey will sooner or later be forced to seek outside help. It could be that of the International Monetary Fund (IMF) - but it is doubtful whether President Erdogan is accepting it. The other option would be to impose strict capital controls to stop the country's cash outflows, while tightening fiscal and monetary policies. In the long run, only substantive reforms to clean up the banking system, strengthen financial regulation and restore confidence will likely pull the Turkish economy out of the crisis.

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