Usually one knows when it happens – the moment something big is starting to unfold, and this goes for all the walks of life - arts, politics and economy.
Like, for example, the 1971 movie “Duel”, directed by then 25-year-old Steven Spielberg that put him straight into movie-makers stardom. It’s about terrified motorist who is stalked upon remote Mojave Desert canyon roads by the mostly unseen driver of an unkempt 1960 Peterbilt 281 tanker truck. The film opened a new era in Hollywood blockbuster movies. The “Jaws” followed four years later.
The political and economic catalysts mostly intertwine, but the pivotal moments are not that difficult to see.
For example, it becomes clearer with each passing day, that what is now happening in Turkey will not stay in Turkey – the events are starting a major upheaval all over the world.
There is no doubt that President Erdogan has more than something of the Chavez about him. And, as we have learned through bitter experience, bad things happen when a Chavez stalks the land.
Recep Erdogan has the ambition to re-create the great Ottoman Empire, capitalizing on the chaos in the Middle East. He doesn’t seem to realize, that he has lost the confidence of the people, internally and externally, to remain a head of state. As result, the markets turned against him in a big way.
Turkey’s economy, just like all other major economies around the world, is utterly dependent on the flow of credit, and now lending is becoming greatly restricted. Turkey has been a huge borrower in global capital markets over the past number of years when the world’s central banks were encouraging investors to stretch for yield by investing in emerging markets.
Investors choose to ignore the retreat of the rule of law and the rise of the rule of man across the emerging markets - Turkey, Romania, Hungary, Poland, China, the Philippines, Mexico - to name just a few.
In case of Turkey, over a half of the borrowing is denominated in foreign currencies, so as the lira sinks, debt-servicing costs and default risks rise inexorably. The lira has fallen 82 percent against the U.S. dollar in 2018, and this is putting an enormous stress on the Turkish financial system. The expense of servicing those loans has jumped, and they will be much more difficult for banks to roll over. The second risk is the sharp rise in nonperforming loans, including those made in foreign currencies, mostly to businesses.
Well, the thing is that Turkey is not alone. Similar scenarios are playing out in emerging markets all over the planet, and another dramatic example is Argentina.
The Argentine peso has lost 8 percent against the U.S. dollar over the last three trading days, and overall it is down about 33 percent over the past four months. In a desperate attempt to restore confidence in the currency, the central bank raised the core interest rate 5 entire percentage points on Monday to a bone crushing 45 percent. Argentina, a serial defaulter on its financial obligations, managed just last year to find buyers for dollar denominated 100-year bonds with 7% interest coupon. Well, for holders of this paper it is one year down, another 99 to go.
In addition to Turkey and Argentina, currencies are also crashing in South Africa, Colombia, India, Mexico, Brazil, Chile and a very long list of other prominent nations. If emerging market currencies keep crashing, events are going to begin to escalate rapidly – the strong US dollar may well break the back of global economy.
For me a Firestarter moment came on one spring morning in a boutique hotel in Vieux-Montréal. I wrote a slow but strong scene looking at the narrow street and waiting for the sun to come into the window. I read it again in the evening and I liked it. As result, I spent the next seven years composing my book, “The Traveler”. It turned out that the first scene didn’t make the final cut and it's not in the book. But I still like it, which means that it will show up somewhere, sometime. I gave it the title “Blinded by the sun”.
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Tom Kubiak is the author of The Traveler