Crisis in Turkey: Why President Erdogan should look to Argentina

Emergency taxes on exports, strict austerity programs and probably soon closed ministries: Argentina is trying hard to resist the economic crisis, which has the South American state more and more firmly under control. Economic policy emergency measures should prevent the collapse. These are drastic and final measures - the Ultima Ratio.

Common remedies to the crisis, such as the continual increase in policy rates, have so far failed to halt the decline in the national currency. Nor did it help that Argentina applied for aid from the International Monetary Fund (IMF). On the contrary, the peso continued to lose value.

The crisis in Argentina has many home-made reasons. But it also shows how quickly international investors can lose confidence in an economy. "In Argentina, the downward spiral of inflation and devaluation has gained momentum so much that higher central bank rates are barely effective," says Jörg Krämer, chief economist at Commerzbank - and this should also serve as a reminder to other states in the crisis: "In Turkey the same thing could happen. "

Turkish President Recep Tayyip Erdogan still refuses to ask the IMF for help. The central bank has also shied away from the much needed interest rate hikes. Most economists agree that these measures should help stabilize the lira or at least halt its decline. Still.

Because if Turkey does not act soon, the country threatens a similar situation as in Argentina. From the bearer of hope to the problem case.

Argentina and Turkey have long been considered the stars among the emerging markets - promising and ambitious. But it has apparently lacked discipline. "Both states have lived massively beyond their means," says Klaus-Jürgen Gern from the Institute for the World Economy (IfW). "The recovery was financed by international funds, which seemed cheap at first, but now threatening to devalue the economy, bringing the economy to its knees."

In Argentina, the state and companies have accumulated more than $ 250 billion in debt abroad, in Turkey it is even more than $ 460 billion. Many loans were taken at a time when both the Turkish lira and the Argentine peso were still stable. The loans often have to be repaid in the foreign currency in which they were taken, usually in dollars.

But that's just getting more expensive. After all, the companies in question generate their revenues in lira and peso. As both currencies lose more and more value, repayments become a menacing problem. For Turkish and Argentine borrowers, it is becoming increasingly difficult to settle their debts, the credit-financed boom comes to an abrupt end.

Compared to the euro, the lira has lost just under half of its value within one year and the peso over 55 percent over the same period. The devaluation of the Turkish and Argentine national currencies in turn fuels inflation rates. These help to drain capital and keep the currency from falling. That's a vicious circle.

Such a development is particularly dangerous for states that import more than export, ie have a current account deficit.

In stable times, such a deficit is relatively unproblematic. But due to the high inflation rates and the massive depreciation of the currency, it becomes an economic hazard. Imports are becoming more expensive due to exchange rate losses, and inflation has a negative impact on people's purchasing power. A risky mix.

The interest rate turnaround in the US has also hit Turkey and Argentina. When the US Federal Reserve raises interest rates, the money goes back to the US - and away from emerging markets. American investors then rarely invest their money in more risky countries and more often in their own country.

This is true for all emerging markets. However, how strong this effect is depends on whether the affected country also has to deal with home-made problems.

Lira and peso would drag currencies of other emerging economies down, is one of the common interpretations of these days. There is talk of an emerging market crisis or a conflagration. This contradicts Volkswirt Krämer. "If individual emerging economies did not do their housework, it's now brutally exposed, and that's especially true of Turkey and Argentina," he says. "In an emerging market crisis, on the other hand, all emerging economies would have to contend with currency collapse and inflation, as in Argentina."

In fact, exchange rates in countries such as India, South Africa or Indonesia have fallen significantly less.

These are self-inflicted problems that are now troubling the Turks and Argentines. In Argentina, the government has apparently recognized the seriousness of the situation and is taking a number of measures to prevent a collapse. Exit? Uncertain.

The South Americans should be considered as a warning example to Turkey. If even more rate hikes do not help curb decay, then one currency, in the worst case a whole economy, stands in the abyss. That's the status quo in Argentina. If not acted soon, it could also come in Turkey so far.

Editor's note: In an earlier version it was said that the lira lost 90 percent of its value in one year compared to the euro. Correct is a loss in value of almost 50 percent. We have corrected the passage.