Guest post by Felipe Cuello
According to the ‘almighty’ IMF, a dollarization is any kind of currency substitution – the relinquishing of accounting in national currency in favor of a foreign currency – whether or not the dollar is involved. Currency substitutions happen when an inflationary spiral and/or devaluation lead monetary authorities to lose credibility with the markets.
The recent loss in value of the Turkish lira has prompted speculation of this possibility with regards the Euro.
Turkey has about US$320 Billion in outstanding payments over the next 18 months, money that will become harder and harder to get as the Turkish Lira keeps sliding downwards.
President Erdogan’s appeal to the Turkish public relies on lavish public spending on infrastructure, and other national prestige projects, like the costly military presence in Syria. With the tanking Lira, the cost of those projects will go way up proportionally to devaluation, risking a public spending crisis like the one in Spain in 2011. This confluence of negative factors could result in a (EURfication? EURalizing? EURination?) or de-lirization of Turkey—the result is the same.
Despite Turkish debt being downgraded total “Junk” status, President Erdogan maintains that he shall overcome. His son-in-law, the Finance Minister, has ruled out any IMF bailout – a frequent solution to situations such as these. The threat of potential sanctions from Washington – a diplomatic impasse regarding an American pastor imprisoned on political charges – rule out dollarizing to the greenback.
Strong words are being flung in both directions: the economic conflagration comes at a time when American analysts are arguing for NATO to even expel Turkey from the alliance.
A Turkish columnist writing in a regime-friendly paper threatened America with another 9/11. For better or worse, the unity within the alliance necessary to expel a member is not currently extant – the head of the German socialist party (half of Merkel’s government) has already come out in support of President Erdogan.
Any remaining doubts about European competition with the White House should be put to rest: after years of European, particularly German (and particularly Left-Wing) criticism of President Erdogan’s human rights record, the German government is taking Turkey’s side in a dispute over the wrongful, political jailing of a priest – to say nothing of more strategic betrayals, like Turkey’s purchase of the Russian S-400 air defense systems letting Russian eyes into Turkish skies.
All these factors contributed to put Erdogan’s back against the economic wall.
Which brings us back to de-lirization. Much of Turkey’s economy is already transacted in Euros – the coastal and European parts, where most of the population lives, widely transacts in foreign currency, particularly Euros. These areas account for the majority of declining Turkish tourism receipts, which represent roughly a tenth of Turkey’s economy.
A potential bailout from the European Central Bank (ECB), with the attendant conditionality clauses indistinguishable from those the IMF might require, would serve to tide over Ankara’s need for liquidity while the change takes effect. The Europeans, on the other hand, could claim a victory for their pet stable of institutions upholding the liberal international order, all the while chalking up a paper victory against the Trump administration – not to mention adding another G20 economy to the Euro universe.
But Turkey does not currently meet the convergence criteria used for countries wishing to adopt the Euro, nor is the Eurogroup – the club of countries that use the Euro – likely to accept a Turkish entry.
If conditions continue to worsen, Turkeys’ only option to save economic stability may be a unilateral currency substitution. This is not unprecedented – Kosovo and Montenegro both exclusively use Euros despite their lack of membership in the EU. In the western hemisphere, Ecuador and El Salvador jettisoned their currencies for the greenback, and the USD is legal tender in Panama at a fixed exchange rate of 1:1, which is essentially the same thing. Zimbabwe climbed out of a hyperinflation spiral by a sudden dollarization, without any involvement from Washington.
Turkey’s foreign minister claims not to want any problems with America.
A way out for President Erdogan, should he surmise the dead end his economy is currently speeding toward, might forestall a much worse fate – a question of regime survival.
It remains to be seen how the White House would react – “no problems” is not likely to be the final result. But is any of that really scarier than the European Central Bank?
Turkey is truly in a bind and as the erudite US Professor Theodore Malloch explained to them in numerous speeches last year in Istanbul and Ankara, it needs to come back into the stable and long-lasting US-Turkey strategic alliance.
They have no one to blame—but themselves.
