Turkey’s Financial Crisis Surprised Many, Except This Analyst

The comments below are an edited and abridged synopsis of an article by Landon Thomas Jr.

For the past 7 years, Tim Lee has been warning that a financial crisis in Turkey would set off a wider calamity in global markets.

Turkey's Financial Crisis Surprise Many | BullionBuzzA plunge in the Turkish lira and the fact that the country might soon need a bailout has spurred an investor exodus in Turkey, one that gathered steam as the currency dropped as much as 16%. Relative to the dollar, the lira is now down 70% this year.

There are signs of the rout spreading beyond Turkey. The stock prices of European banks, which have been big lenders to the Turkish banks, dropped sharply last week, with investors worried that a wave of corporate bankruptcies in Turkey would lead to a banking bust in the country. The currencies of China, Brazil and Mexico also weakened.

Suddenly Tim Lee’s largely ignored prophecy—that a decade of Turkish companies and real estate developers gorging on cheap foreign debt would end badly, not just for Turkey but for the world—does not seem so outlandish.

In 2011, Lee predicted that Turkey would need a $100-billion bailout. In 2013, he got more specific: The lira, then trading at 1.9 to the US dollar, would crater to 7.2.

As the lira loses value, it becomes more expensive for Turkish companies to repay their dollar-denominated loans. A growing number of companies in Turkey already have said they cannot repay these loans, and this could signal what lies ahead for assets and economies that were inflated by cheap debt.

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