Will Turkey's economic woes reach Europe?

A U.S. Air Force A-10 Thunderbolt II departs Incirlik Air Base Turkey Jan. 20 2018

Early on Friday, the lira hit a new record low, plunging to as far as 6 per U.S. dollar after a Turkish delegation returned from talks in Washington on Thursday with no apparent solutions to an ongoing crisis.

Markets believe that the Turkish issue has reached a magnitude that could well see the European Central Bank refrain from ending its supportive quantitative easing programme at the end of 2018, and this could in turn delay an interest rate rise in late 2019.

Turkish President Recep Tayyip Erdogan has lashed out against a shadowy worldwide "interest rate lobby" which he suggested was "campaigning" to harm Turkey's economy, after the lira fell more than 14 percent overnight.

The pound was up 0.15 per cent against the euro but was down 0.5 per cent against the dollar, taking it to a 13-month low.

Today's declines have dragged down European shocks, with the Stoxx Europe 600 falling three per cent on its exposure to banks and miners.

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"It's been a double whammy for the lira", said Rodrigo Catril, a senior currency strategist at National Australia Bank in Sydney, referring to the tensions with the United States and the Financial Times report. Raising the rates has been heavily opposed by Erdogan. A delegation from Ankara visited Washington this week to meet with officials from the US State Department and the Treasury, but no apparent solution to the crisis has been found.

"The TRY is in a full-blown currency crisis as the number of negative stories increases", says Morten Lund with Nordea Markets. Washington imposed financial sanctions on two Turkish ministers and warned of additional measures. Let's see if we'll have the potential to get there after Erdogan's speech.

"The near-term path for the TRY is more in the hands of Ankara".

The new economic action plan calls for Turkey to issue a renminbi bond and borrow from China to proceed with 400 new infrastructure and other showpiece projects whose value is estimated at $9 billion. "Due to the foreign debts of companies and banks and the current account deficit, there is a great need for foreign capital".

This could therefore well translate into the Euro staying under pressure.

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