Turkey's Lira Falls To Its Lowest Value In Years

Potential changes in economic policy from Washington have sent tremors throughout emerging economies. In Turkey, where growth in recent years has put Eurozone economies to shame, the signs are troubling: The Turkish lira has fallen to its lowest value in years and private sector debt is soaring. Economists say continued liquidity and foreign investment remains crucial if Turkey is to avoid a hard landing.

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The decision by the Federal Reserve not to stop pumping billions of dollars into the bond markets cheered Wall Street. It's also welcome news to currency traders and many emerging economies. Investors worried about money-tightening policies have been pulling capital out of places such as Brazil, India and Turkey.

From Istanbul, NPR's Peter Kenyon reports.

PETER KENYON, BYLINE: News that the Federal Reserve wouldn't even be trimming its monthly exercise in shoring up in the economy buoyed Turkish assets across the spectrum. The sagging Turkish lira was up some three percent against the dollar, building on gains earlier in the week when it was announced that Larry Summers won't be replacing Ben Bernanke as Fed chairman. The Turkish stock market cheered up with a 6 percent jump.

As it happened, the Fed's announcement came just hours after the opening of Istanbul's annual financial summit, a gathering of those who have money, those who regulate it and those who watch it. Speaking before the Fed's announcement, Turkish Deputy Prime Minister Ali Babacan characterized Turkey's chronically large deficit as a necessary byproduct of healthy economic growth, and he pointed out that public sector debt was well down recently. Babacan did not, however, predict that Turkey's economy is out of the woods.

DEPUTY PRIME MINISTER ALI BABACAN: (Foreign language spoken)

KENYON: Of course, what I'm saying doesn't mean everything is roses, we have no problems and everything is perfect, he said. If a country is growing, it may normally have a current account deficit of 4 to 5 percent. But if it gets to be more than that, of course, that would be a problem and measures should be taken.

Babacan also glossed over concerns that while the government's debt may be down, over in the private sector, debt is ballooning at a time when investors are growing wary of volatile emerging market economies such as Turkey's. Economic columnist Emre Deliveli says whether the Fed reduces its economic stimulus this year or next, Turkey should be concerned that the movement of capital out of emerging economies could become more than a temporary headache.

EMRE DELIVELI: I personally think that this is not temporary. I mean, what we are seeing is a kind of a new environment of low liquidity. So, I mean, if that scenario turns out to be true, then Turkey may see some kind of crash landing at some point.

KENYON: Deliveli isn't necessarily predicting that and says a hard landing now would not be as bad as the crisis of 2001 when Turkey's semi-dysfunctional banks underwent painful reorganizations. He sees at least a couple possible downside scenarios in the near term - volatile economic performance, with strong growth one year and contraction the next, or steady but anemic growth. The problem, he says, is the country's reliance on outside money.

DELIVELI: And the thing is that this country cannot grow without external financing. So that's the huge issue and that's what, you know, people are worried about, the middle income trap. More than the crisis - one year negative 2 percent, other year 5 percent. I'm more worried about Turkey getting stuck at 2 to 3 percent growth forever.

KENYON: On the other hand, some economists argue that in Turkey and elsewhere, much of the negative effect of a cut in economic stimulus has already taken place, simply on the basis of Bernanke talking about the possibility. For now, Turkey's economic indicators have a healthier glow, and officials point out that the country's second-quarter growth of more than 4 percent would be the envy of most eurozone countries.

Not everyone was thrilled with the Fed's decision, however. Among those most disappointed, according to Bloomberg News, hedge fund managers hoping to make millions by betting on more economic pain for emerging market economies.

Peter Kenyon, NPR News, Istanbul.

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