Andrew Brunson arrived in the ancient Turkish city of Izmir in 1995 as an evangelical missionary.
Probably one of the notions furthest from his mind was that he’d help bring down world financial markets.
But fast forward 23 years and Pastor Brunson is at the epicentre of events that could lead to the end of a nine-year raging bull market…
… and bring asset prices crashing down.
Turkey’s heading for bust
It won’t be down to the preacher himself. Of course not.
But he’s in the mix for sure, part and parcel of the escalating crisis between Turkey and the US.
Turkey’s already a mess.
I won’t go into the whole story here…
There’s too much else to talk about – stuff that threatens to take down your money – which we’ll get to in a moment.
But to keep it short, Turkey’s a victim of the ultra-low interest rate environment that’s existed since the last Global Financial Crisis of 2008.
Back then the world’s central banks slashed interest rates to near zero.
They wanted to encourage borrowing… as a way to jump-start the global economy.
Emerging market countries didn’t hesitate.
At the time, their own domestic borrowing rates were much higher than in developed markets.
So, if the US and Europe would lend them money at next to nothing… it was a no brainer.
Along with other emerging economies, Turkey was straight in.
Its banks and businesses went on a binge.
A boom built on cheap credit
They sucked up hundreds of billions of cheap dollars to fund a domestic construction boom.
The New York Times reports:
“According to the Institute of International Finance, a banking trade group, corporate debt in foreign currencies is $5.5 trillion, the most ever.
“And Turkey relies on such foreign-currency debt more than any other major emerging market. Corporate, financial and other debt denominated in foreign currencies, mostly dollars, represents about 70 percent of Turkey’s economy, according to the I.I.F. Turkish companies and real estate developers used borrowed dollars to pay for new factories, shopping malls and the skyscrapers that now define the Istanbul skyline.”
The problem is, the Turkish government has been spending far more on its growth splurge that it’s been getting in revenue.
And it’s been buying far more overseas goods and services than it’s been selling of its own.
The result is: massive twin deficits to go with its huge foreign currency debt (more than 50% of its economy, according to the IMF).
Which doesn’t automatically mean disaster.
Plenty of countries put themselves in that position and carry on.
Hear that cracking sound?
It’s all fine… if interest rates for the currency you’re borrowing in (mainly dollars) stay low…
… and if your domestic currency is stable – i.e. it maintains its value against the dollar.
But as you’ll know as well as me, neither is happening.
The US central bank is raising rates.
And the Turkish lira has been absolutely battered.
It’s down more than 40% against the dollar so far this year.
The country’s president, Recep Tayyip Erdogan, blamed the slump on an orchestrated attack by foes like America.
But the economy was already creaking and straining under Erdogan’s mismanagement.
All that debt-fuelled activity I mentioned earlier…it’s caused Turkey’s economy to overheat.
Inflation’s already running at 16%, compared to its central bank target of 5%. That’s nasty for consumers who must pay more for their general living.
So how do you sort that out?
A disaster of Erdogan’s making
It should be the job of the central bank, shouldn’t it? That’s what would happen here in the UK or in the US or Europe.
It’s the central bank’s job to control the price of money (interest rates) and so to control inflation.
But not in Turkey.
Rather than allow the central bank to raise rates to fight inflation, Erdogan insists on low rates to fuel growth.
Raising rates would support the lira.
But keeping rates low – against the central bank’s guidance – has caused a huge loss in confidence in Erdogan… and in Turkey as a place to invest.
That’s resulted in ‘scared’ international money rushing for the door as investors start to think about the possibility of Turkey defaulting on its debt.
In turn, it’s caused a massive run on the lira as investors sell it to buy dollars, euros, pounds or any other currency.
And Donald Trump’s making things worse with his actions over Andrew Brunson, the US pastor.
He’s been in a Turkish prison for the best part of two years, accused by Erdogan of spying and terrorism (which Brunson denies). It was part of a crackdown by Erdogan following an attempted coup.
He was due to be released last month. But instead he’s still being held under house arrest.
So, Trump has hit Turkey with sanctions which has in turn heaped further pressure on the lira.
Here’s why this matters to you now…
It’s easy to dismiss the Turkish crisis as insignificant in the scheme of things.
After all, its economy accounts for something like 1% or less of the world economy.
And let’s face it, most of us don’t hold many Turkish stocks in our ISAs!
But the bigger worry is what comes next? If Turkey is in trouble because of its decade long cheap credit binge… who else is on the hook?
And now that a light’s being shone on Turkey – and on other emerging markets by association – how long before the panic spreads?
The New York Times provides a history lesson on emerging market crises for us:
“One highly indebted, fast-growing economy starts to unravel, and others tend to follow, as fearful investors rush for the exits. In most cases, those countries’ economies aren’t all that large, but the chain reactions they trigger in the financial markets can have global repercussions.
“In 1994, the Mexican government devalued the peso, setting off a period of financial instability that came to be known as the Tequila Crisis. In 1997, the collapse of the Thai baht set off a financial crisis throughout East Asia.
“And in 1998, the devaluation of the Russian ruble threatened to spread instability to the heart of the developed world, when it contributed to the collapse of large American hedge fund Long Term Capital Management, sending financial markets in the United States into a panic.
“In past crises, one way that trouble spread was through the banking system. Foreign banks lent money to companies, investors and governments in the crisis-stricken countries. As borrowers defaulted, those loans led to deep losses that threatened to undermine the health of financial systems thousands of miles away.
“There are echoes of that situation in today’s Turkey crisis. A number of large European banks — including Italy’s UniCredit, Spain’s BBVA and France’s BNP Paribas — own stakes in Turkish lenders. Other western banks are exposed to Turkey via loans to Turkish companies.”
Where next?
The thing is, with the Turkish lira losing some 40% of its value, there will be casualties.
We’re talking major defaults and bankruptcies among companies who have borrowed up to the hilt in dollars.
Even more worrying is the thought of all the other emerging markets that are in a similar position – with over-indebted companies and economies facing rising US interest rates.
What happens when investors start pulling out their money left from all these markets?
I’m not sure – but it could well be that it’s done in a bit of a panic… as uncertainty reigns.
And as we see time and time again, uncertainty is what the markets really cannot handle.
It tends to lead to sell-offs – across all correlated markets.
Which means not only emerging markets – but in developed stock markets too…
And don’t think the Turkey situation is the only potential pin out there…
There are plenty more that could prick this cheap-money-fuelled stock market bubble.
I could carry on – but I know you’re busy.
So, let’s pick this up tomorrow – where we’ll think about some more very real threats to the markets and your money… and what to do next.
Tune in tomorrow.