TLDR ERDOGAN PRINTING CASH, LIRA BECOMES WORTHLESS
ELECTION ON 24 JUNE
The Turkish currency and debt crisis of 2018 is an ongoing financial crisis in Turkey with international repercussions due to financial contagion. It is characterized by the Turkish lira plunging in value, high inflation, rising borrowing costs, and correspondingly rising loan defaults. The crisis was caused by the Turkish economy's excessive current account deficit and foreign-currency debt, in combination with President Recep Tayyip Erdoğan's increasing authoritarianism and his unorthodox ideas about interest rate policy.
A longstanding characteristic of Turkey's economy is a low savings rate. Since Recep Tayyip Erdoğan assumed control of the government, Turkey has been running huge and growing current account deficits, $33.1 billion in 2016 and $47.3 billion in 2017, climbing to US$7.1 billion in the month of January 2018 with the rolling 12-month deficit rising to $51.6 billion, one of the largest current account deficits in the world. The economy has relied on capital inflows to fund private-sector excess, with Turkey’s banks and big firms borrowing heavily, often in foreign currencies. Under these conditions, Turkey must find approximately $200 billion a year to fund its wide current account deficit and maturing debt, while being always at risk of inflows drying up; the state has gross foreign currency reserves of just $85 billion.
Money supply in Turkey has grown at an annual rate of 16 percent since 2014, and 18 percent since 2016. This compares to an annual growth in money supply, as calculated under orthodox economic theory by economist Steve Hanke, of no more than 13 percent in order to meet the central bank’s inflation goal of 5 percent. As a consequence of these easy money policies, Turkey has experienced substantially higher inflation than other emerging markets. In 2018, the lira's exchange rate accelerated deterioration, reaching a level of 4.5 USD/TRY by mid-May and of 4.9 USD/TRY a week later.
Erdoğan, who claimed interest rates beyond his control to be "the mother and father of all evil", shared unorthodox interest rate theories in a 14 May interview with Bloomberg and said that "the central bank can't take this independence and set aside the signals given by the president." Presidential interference with central bank policy comes with a general perception in international investment circles of a "textbook institutional decline" in Turkey, with Erdoğan seen increasingly reliant on politicians whose main qualifications for their jobs is loyalty, at the expense of more qualified and experienced options. Erdoğan also has a long history of voicing Islamist discourse of interest-based banking as "prohibited by Islam" and "a serious dead-end".