EM Duel: Argentina and Turkey

EM Duel: Argentina and Turkey

The countries with the two worst-performing currencies in 2018 are taking very different paths to resolving their challenges; Italy added a second budget conflict to its agenda.

"It's a little bit like a game of chicken.”
Minnesota Fed President Neel Kashkari, on U.S. trade negotiations

Turkish lira vs. Argentine peso: No winners here The Argentine peso and Turkish lira are the worst and second-worst performing emerging market (EM) currencies so far in 2018, down (51.7%) and (42.1%) respectively. But the countries’ policy responses could hardly be more different.

Argentina, eager to remain a participant in the global economic system, has taken a textbook response to its slumping currency. Its central bank has hiked its base interest rate to a world-record 60% and has repeatedly sought and received world-record emergency funding from the International Monetary Fund (IMF). So far, the moves appear to have had little impact. A request to the IMF to accelerate the payment of already-agreed funds was read as a signal of desperation, further spooking currency markets earlier in the week. Currency traders’ continued bearishness may reflect the reality that IMF aid usually comes with onerous conditions, including austerity measures that often provoke recessions and internal political turmoil.

Turkey, on the other hand, has shown little interest in conventional remedies. The country hasn’t approached the IMF for assistance and has resisted calls to increase its base rates to stem the tide.  In fact, a key part of Turkey’s pro-growth economic program is to keep interest rates low; the current crisis was set off in part by the country’s refusal to raise rates in the face of rapidly rising inflation. Also contributing: conflict with the U.S. over Turkey’s imprisonment of a U.S. pastor, and the resulting trade embargos; the lack of independence of the central bank, and President Erdogan’s strongly nationalist program – which includes low interest rates, unfettered spending on infrastructure, and scapegoating of the global financial system.  This program strongly resembles Malaysia’s initial reaction to the 1998 currency crisis; however, Malaysia eventually instituted strong capital controls, shutting out both investors and speculators, and rode out the crisis without soliciting aid from global organizations.

Italy: Challenging the EU budget As if putting together its own budget isn’t enough of a challenge, Italy has stepped into the EU’s budget talks by invoking Europe’s immigration policies, a key flashpoint for the EU overall. The main issue is EU funding of Italy’s portion of the costs of managing its share of incoming migrants, as agreed by the EU in June. Criticism of Italy’s actions toward migrants aboard an Italian coast guard ship docked in Sicily was the proximate cause of the disagreement, which has its own long history. The threat is to veto the EU’s budget if other EU members don’t adhere to the June agreement to Italy’s satisfaction.  Though it’s unlikely that Italy alone can stall the adoption of the budget, adding immigration to the budget talks could make them even more difficult to conclude.


All market-related data Source: Bloomberg, August 30, 2018 unless otherwise stated



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