Bracing for a currency crisis

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Bracing for a currency crisis

The Turkish currency crisis is sprawling and spreading, and there’s no end in sight to the lira’s freefall. The government’s emergency actions to stabilize the lira by increasing liquidity helped little. The lira has lost 46 percent of its value against the U.S. dollar so far this year and more than 20 percent over the last two weeks. Foreign tourists rushed to luxury stores for half-price bargains in lira. Luxury-hungry Koreans have been frantically hunting for bargains on Turkish shopping websites.

The Turkish crisis is spreading into other emerging markets. A liquidity and financial crisis, as in the case of Asian currency crisis in 1997 and the Wall Street-triggered global meltdown in 2008, can be highly contagious. The Turkish crisis has aggravated the woes of debt-ridden emerging markets. The Argentine central bank lifted the main interest rate by 5 percentage points to 45 percent after the peso slipped to a new low against the dollar.

The Turkish currency, weighed down by political, fiscal and interest rate vulnerabilities, received another blow after Turkish President Recep Tayyip Erdogan invited sanctions from U.S. President Donald Trump over a detained U.S. pastor. The confrontation with Washington, however, is just a trigger. Turkey’s current-account deficit has been ballooning due to its weak industrial base, and its indebtedness became risky due to rising U.S. interest rates. The dangerous mix of higher interest rates and the U.S. dollar puts the other highly-indebted emerging economies of Argentina, South Africa, Mexico, Brazil and Russia — and their currencies — at equal risk.

Although South Korea has less to worry about thanks to a comfortable stock of foreign exchange reserves and a sizable current-account surplus, it is not entirely safe. Its foreign debt against gross domestic product hovers at 41 percent, which is close to as dangerous a level as Turkey’s 70 percent, Hungary’s 64 percent, and Argentina’s 54 percent. The danger can be contagious. The authorities must be fully prepared to fend off danger before it spreads to Korean shores.

JoongAng Ilbo, Aug. 16, Page 30
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