Is the financial crisis 2.0 imminent? Turkey 2021 and Lehman 2008. An analogy?

Relatively unobserved by society, the Turkish lira is plummeting. Today, you get about 50 percent more lira per U.S. dollar than two months ago. Economist Prof. Christian Kreiß examined the situation.

On November 23, 2021, the exchange rate of the Turkish lira to the U.S. dollar was about 12.70 lira per dollar. In mid-September, the rate was still around 8.50. So today you get about 50 percent more lira per dollar than two months ago.

Five years ago, in November 2016, the lira was at about 3.5, so today you get about three and a half times as many lira per dollar as you did five years ago. In other words, the lira has nearly quadrupled in value over the past five years.

High Turkish debt in foreign currency

Turkey had total debt of about 153 percent of GDP in the second quarter of 2021, according to the Global Debt Monitor. With 2020 GDP of about $720 billion, that translates to about $1,100 billion in debt. External debt was $446 billion in the second quarter of 2021. This is equivalent to 62 percent of GDP.

According to calculations by the Institute of International Finance, Turkey's foreign currency debt was 80 percent of GDP at mid-year 2021. This is equivalent to about $576 billion. So Turkey has significant foreign currency liabilities. This means that if the lira weakens, servicing foreign currency debt will become more difficult.

Turkish companies alone currently have 33.8 percent of GDP, or over $240 billion in foreign currency debt. Converting the debt into lira means that these Turkish companies now have to service 50 percent more debt in Turkish lira terms than they did two months ago.

That could put some companies in liquidity difficulties and lead to debt service problems. The same applies to the Turkish government, which has 23 percent of GDP in foreign currency debt, and Turkish banks, which also have foreign currency debt of 23 percent of GDP.