The sugar crash of the Turkish Lira

Leo Zhang

By Leo Zhang

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Editor's Note

On Thursday, the Turkish Lira fell 17% against USD, reaching a historical low point. Due to the massive lending to Turkey from European banks, the Euro also immediately dropped 0.8%. So far in 2018, the Lira had already lost around 40%. It is incredible that a top-20 economy by GDP can lose almost half of its value in less than a year.

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(Source: xe.com)

How did the Lira get here in the first place? The fundamental issue is that the government controls the central bank, and uses money-printing to meet its fiscal needs. In the past decade, the Turkish money supply (M2) has almost quadrapled, while the interest rate is suppressed to 4.5%. Such aggressive monetary policy was encouraged by the leadership.


source: tradingeconomics.com

Over time, excessive money-printing causes foreign reserves to decrease, and increases Turkey's public debt. Coupled with a strong dollar, the motvations for capital to flee Turkey are growing.


source: tradingeconomics.com

But this script is not unfamiliar. Ten years ago the Greek financial crisis dragged the European Union into its quagmire of debt, and its dire effects quickly swept across the continent. Today, Turkey has managed to kidnap Europe into its financial saga, despite not being a member of European Union.

Banco Bilbao Vizcaya Argentaria SA, UniCredit SpA, and BNP Paribas SA are highly exposed to Lira due to their massive Lira-denominated loans. Data from the Bank for International Settlements (BIS) showed that Spanish banks are due $83.3 billion by Turkish borrowers; French lenders are owed $38.4 billion; and banks in Italy are owed $17 billion, the FT reports.

For the EU, this is a dilemma: saving Turkey means (for now) buttressing the controversial Turkish President Recep Erdoğan, whose power will substantially increase; not forgiving or restructuring Turkish sovereign debt could cause a systematic risk that is even more severe than Greece.

While the global macro-economy is highly complex and multi-variate, excess money-printing may perpetuate the extreme cycle of greed and fear. As we start taking closer scrutiny at the paradigm that define the monetary policy as we know, it is worth questioning what constitutes "sound money". After all, money is a technology that superintends our every day lives; it is informational plumbing.

Volumes surge on Turkey's crypto exchanges as Lira tanks
(CoinDesk, by Leigh Cuen)

"'If your national currency is falling like this ... or you don't trust centralized currencies and banks, what can you do? You should be your own bank, and I'm sure people all around the world will realize that soon.'"

The bullish case for Bitcoin
(Vijay Boyapati)

"In the coming years there will be a great struggle between entrepreneurs and innovators in Silicon Valley, who will attempt to keep Bitcoin free of state control, and the banking industry and central banks who will do everything in their power to regulate Bitcoin to prevent their industry and money-issuing powers from being disrupted."

This week's readings

Tuesday: The purveyors of smart contracts slowly bleed out
Wednesday: Who wants to upgrade their home appliances to mine crypto
Thursday: Everything crumbles when the margin calls

Further readings

A guide to 99% fault tolerant consensus
(Vitalik Buterin)

"If the fault tolerance of the threshold-dependent consensus algorithm is met (usually 50% or 67% honest), then the threshold-dependent consensus algorithm will either not finalize any new checkpoints, or it will finalize new checkpoints that are compatible with each other (eg. a series of checkpoints where each points to the previous as a parent), so even if network latency exceeds D/2 (or even D), and as a result nodes participating in the latency-dependent algorithm disagree on which value they accept, the values they accept are still guaranteed to be part of the same chain and so there is no actual disagreement."

Behavioral cryptoeconomics: the secret of digital currencies
(Hackernoon, by Amber Cazzell)

"The departure between the unlimited nature of digital goods and the limited nature of fiat currency is also evident in the outlandish revenue streams of information giants like Google ($110B) and Facebook ($41B). They’ve captured a product that is infinitely replicable (user information relevant to advertisers) and charged for it in the form of limited resources (USD). Capitalism works (worked?) because the same good can’t be sold twice."

An overview of privacy in cryptocurrencies
(Richard Chen)

"Overall, privacy is one of the most exciting areas of cryptography research right now, and there is much work to be done on optimizing the efficiency of these theoretical techniques to be practical to use in the real-world. Research labs, such as the Stanford Center for Blockchain Research, are actively making progress in this field and it will be exciting to see what major breakthroughs will happen over the next few years."

TSMC: outbreak of malware that triggered delays & losses caused by software for new tool
(AnandTech, by Anton Shilov)

"What remains to be seen is how several-day outage of numerous semiconductor production tools is set to affect TSMC’s customers in general. After all, 2% of TSMC’s Q3 revenue is between $169 and $171 million and that is a lot of money. We will likely learn more about the effect of the malware outbreak in the coming months."