The wannabe Sultan of Turkey has told the Central Bank of the Republic to keep the value of the Turkish Lira below the 7 Lira per U.S. Dollar level.
The central bank was also told to not raise its interest rate. The economy must keep growing!
That left only one thing that the bank could do. It had to spend its foreign currency reserves to buy up Lira in the open market to keep it from falling further.
Unfortunately those reserves are limited:
The pace of the CBRT's reserve burn has accelerated in response to TRY weakness. Economists at TD Securities estimate that the CBRT will completely exhaust Net International Reserves this week.
“Given the current trend, we estimate that total reserves will be depleted at the latest by the 3rd week of September, at the earliest by the 3rd week of July.”
“Before all buffers are depleted, we think the CBRT will hike rates dramatically and likely introduce tight capital controls. Turkey may also seek multilateral support if this scenario materializes.”
Under Erdogan's rule the Turkish industry has taken up a lot of debt that was denominated in U.S. dollar. It has to be paid back in a foreign currency. A sinking Lira will make foreign denominated loans much harder to pay back. Higher interest rates will make local consumer debt more expensive and will reduce local demand. The debt fueled boom Erdogan had engineered over the last years will now be followed by a severe crash.
That is likely to dampen Erdogan's appetite for further adventures in Syria and Libya. Qatar, his partner in those crimes, has its own trouble due to the deep drop in oil prices. The last time the Turkish Lira was under pressure Erdogan received a large loan from Qatar. But now Qatar itself has to borrow billions to stay afloat.
That leaves the International Monetary Fund as the only place where Erdogan can receive fresh money. IMF loans come with conditions over which the U.S. has a large say. We can be sure that the Trump administrations will have 'conditions' that Erdogan will not like - at all.
The situation creates another opening for Russia. Putin might offer Erdogan a helping hand, and a few billion dollars in loans from Russia's plentiful reserves, to finally bring him under control.
Altogether we are in for some interesting developments.
Source: Moon of Alabama