The Price of Cheap Dollar/Euro Debts: Local Currencies Come Unglued, Debt Crises Ensue

Grand Collapse in Turkey; to avoid the same fate, Argentina hikes rate to 45%.

On Monday, Argentina’s central bank responded to the currency chaos in Turkey and other sections of the Emerging Markets, including the ongoing collapse of the Argentine peso: It raised its policy rate by five percentage points to 45%.

Argentina’s annual rate of inflation in June surged to nearly 30%, and indications are that this is getting worse. The central bank (the BCRA) is part of the Ministry of Finance, has no independence, and has been tasked over the decades to fund government spending. But at least the current government publishes inflation data. The prior government made inflation a secret and made independent publication of inflation data illegal.

To soothe everyone’s nerves apparently, the BCRA promised to keep the rate at 45% until October. This was the fourth draconian rate-hike since April 27.

Argentina has also received a $50-billion bailout loan commitment from the IMF with which to prop up the peso. This money, which was approved in June, comes with some IMF strings attached. Flush with this bailout money, the government has since been selling dollars and buying pesos in daily auctions to put a floor under the peso. But on Monday, along with the rate hike, the government stopped throwing those dollars out the window, hoping that higher rates will do the job.

And so the peso dropped only 2.3% today against the US dollar to a new low of 29.93 pesos to the dollar. Seen the other way, one peso, which in 2000 was still worth $1, is now worth 3.34 US cents. It lost 8% over the past 3 days and 33% over the past four months:

Oh my, what a change this is from June 2017, the peak of the junk-bond craziness, when Argentina, which is junk-rated, was able to sell $2.75 billion of 100-year dollar-denominated bonds, the first time ever that a junk-rated country was able to find investors willing or desperate enough to buy century bonds denominated in a foreign currency – and this from a country that over the past 67 years, has defaulted six times on its foreign currency debts: in 1951, 1956, 1982, 1989, 2001, and its “selective default” in 2014. For the holders of those century bonds, one year down, 99 more to go.

Turkey has its own sets of problems and isn’t even seriously trying to prop up its currency. Now global bondholders are clamoring for the IMF to step in and calm the waters around the currency crisis in Turkey that has turned into a debt crisis that is now dragging some European banks through the dirt. Those global bondholders want the IMF to lend Turkey money to bail out Turkey’s bondholders to put an end to the turmoil and torture in emerging markets bonds that were so hot just eight months ago.

In return for an IMF bailout of its bondholders, Turkey would have to follow the IMF’s program, slash its expenses, including social expenses, and curtail its crazy borrowing binge. But no go.

Instead of trying to address the problem, or beg the IMF for a bailout, the Turkish government has heaped scorn on the West. In return, the Turkish lira plunged another 8% against the dollar on Monday, to 7.04 lira to the dollar.

Seen the other way around, as the chart below shows, the value of 1 lira has now dropped to 14.4 US cents, from 25 cents just four months ago, which, if nothing else, tells people to go figure out how to invest in gold and silver. Monday’s drop brings the grand collapse over the past three days to 24%, and over the past four months to 43%:

After nine years of experimental monetary policies in the US, Europe, Japan, and elsewhere, the Emerging Market economies have become addicted to this debt borrowed in a hard currency that they cannot inflate away. In Turkey, this cheap debt – cheap even for junk-rated issuers such as the government of Turkey – funded a construction boom in the property sector. This construction boom has been crucial to the economy – which is why the government is trying to ride this bull all the way.

Turkey’s inflation is surging. In July, annual inflation reached 16%, the highest since January 2004. Inflation is what ultimately destroys a currency. But it’s not yet 30% as in Argentina, and perhaps the government thinks it still has some leeway.

The Turkish lira always hits record lows against the dollar, interspersed with brief periods of upticks, because the Turkish government has always destroyed its currency at a blistering speed. But even for Turkey, this is a bit much.

A currency crisis is one thing. But when a currency crisis morphs into a foreign-currency-denominated debt crisis, all heck tends to break lose. This is when the cheaply borrowed dollars and euros that the economy has come to depend on suddenly dry up. And then the whole economic edifice based on this debt tends to come unglued.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  62 comments for “The Price of Cheap Dollar/Euro Debts: Local Currencies Come Unglued, Debt Crises Ensue

  1. Old dog says:

    Erdogan named son-in-law head of Turkey’s finance ministry. Then he wonders why the economy has become a cluster pluck. Yet, he blames the West for Turkey’s problems and accuses the US of fowl play

    [sorry, I couldn’t resist].

    • fajensen says:

      Sure –

      For an Authoritarian, the only problems that can exists are always caused by people / things that are outside of the control of the authoritarian.

      Tis is because If it was admitted that there were problems inside the domain of the Authoritarian, then he / she / it would not be in perfect control, having less than 100% authority as it were, which is just not on.

      Therefore, to solve those few remaining problems, the authoritarians will alway and forever needs to expand their domain.

      Since most authoritarians are also serial fuck-ups, some (outside forces) might say this is compounding the problem.

    • Cynic says:

      Just as a neurotic little Austrian blamed all of Germany’s problems on a certain race, Erdogan blames all of Turkey’s – and the fall of the Ottoman Empire -on the West.

      It’s the core idea of his election rhetoric: the West a false friend, intent on keeping the noble race of Turks down, and Erdogan the strong, inspired man needed to set things right.

      All most curious in a NATO member…..

      Until now, rising Turkish prosperity has seemed to confirm his thesis, to the average Turk in the cafe: Erdogan = Greatness.

      However, presented with a problem of this magnitude, Erdogan has nothing to offer except megalomaniac posturing,and yelling about ‘traitors’ from his bunker. I wonder when the piano wire hangings will start?

    • Paulo says:

      This time of year (and economy), birds of a feather flock together and migrate! Of course we can all put our heads in the sand and listen to pundits parrot how strong the US economy is! Me? I built up the nest egg years ago, migrated, and now just lsiten to my rooster crow all day long….beats Jim Cramer(s) and makes a whole lot more cents. :-)

  2. DJ says:

    Gold and silver prices constantly getting blasted. Starting to think those saying that market is highly manipulated may be correct. It appears the manipulators are trying get the public to capitulate and sell their PMs out of fear of even lower prices. Times are getting more uncertain and PMs are not gaining from the usual flight to them as a safe haven store of value.

    I myself will continue my slow but steady accumulation of PMs in hard and soft form. Appears right now my kids will say we inherited a bunch of PMs from my crazy father. But at least they understood when I told them a 1964 quarter will buy you a gallon of gasoline and a 1965 quarter will buy you 25 cents of gasoline.

    • Hoosier says:

      “Gold and silver prices constantly getting blasted. Starting to think those saying that market is highly manipulated may be correct. It appears the manipulators are trying get the public to capitulate and sell their PMs out of fear of even lower prices. ”

      China has been a principle buyer of precious metals over the last ten years. Their dollar reserves will be diminished by Trump’s new tarrifs. I suggest you hold back on buying the shiny stuff for a few months.

      China has been buying gold with US dollars and now that the Yuan is coming coming under pressure they need to use those dollars to buy up Yuan to prevent their currency from exploding. So gold is not being bought and is likely being liquidated by the Chinese to stabilize their currency.
      Also, every other emerging market country will be liquidating their gold to ‘buy US dollars’ due to the strengthening dollar.

      I’m waiting for a strong dip below $1000 before I get back in.

      So make claims about manipulation (everything made by man is manipulated), but what I’ve cited above has been common knowledge for months now. Rising rates on treasuries in the USA will destroy the emerging markets. (unless the Fed starts to cut, then gold will pop-.).

      • Northwest Resident says:

        Do you think the price of gold and/or silver will drop below its production price?

        • Ambrose Bierce says:

          Some of the miners will close down when their operation drops below production costs, closing down a lot of juniors. There’s been a positive bias in the index toward the royalty companies who finance these projects for a share of the income. Now those earnings may be in question. I do ask the question if central banks can print money to buy bonds in corporate zombie companies, why not print money to buy PMs? To that end they can also print money to hedge futures contracts and drive the price lower. When gold goes to 800 there may not be any.

        • Adams says:

          It may already be below production costs at some bigger silver producers.
          First Majestic’s 2Q report stated that their
          comple cost of production is at $ 16.01
          per oz.

      • Sadie says:

        Interesting links, especially the CNY tracking gold. I need to get back to reading Zero Hedge again.

        • monday1929 says:

          Whatever you do, do not read the vile comment section at ZH. Otherwise a useful site at times.

        • Frederick says:

          Monday The comment section is the best part Those boys are wide awake unlike many here at WS It’s unfortunate that you don’t appreciate the truth

    • fajensen says:

      … usual flight to them as a safe haven store of value.

      In a leveraged market going down the main problem is to get the value out – storing it comes later.

      What always happens on the up-slope is that people borrow against boring stable investments to pursue some more dynamic “growff”-type exploits. When those “growff”-stocks go bad, then there is a margin call and they have to unwind both positions.

      There is no “flight to safety” because it is all netted out already.

    • Nicko says:

      You’d be better off buying investment property/land in save haven locations. At least you can charge rent.

      • blindfaith says:

        Where? When it happens, and we all know it is going to, there will be no safe havens…not even on Molokai.

        • Nicko says:

          Goodness….the world isn’t collapsing into a Mad Max hell-scape. The global economy is still growing, there will be a correction….and life will go on.

        • Paulo says:

          I don’t know about that. Vancouver Island looks pretty good and when I am done reading these comments I plan to go paint the fascia on our rental. After that I will sickle mower cut some elk trails to divert the fall herds away from the house, orchard, and garden. I bought this land 15 years ago during a local downturn and because the previous owner needed unpaid tax money. (He used his tax money for booze, coke, and good times). If I had PM what the hell could I do with it? Think about it squirreled away and hope others say it’s valuable? I know land is valuable in a world of 7 billion+, especially productive land in a country that respects the rule of law…

          Tomorrow is a grocery run and I will use the plastic ones and zeros for 2% cash back of more ones and zeros. Crazy world for sure. When the Costcos shut down …. Hope not, though. I really like Costco. Good cheese.

        • Maximus Minimus says:

          If you live on Vancouver Island, you have to block off in your mind that you live in a major earthquake area. That and the fact that the main supply route to the island is by ferries.

        • nick kelly says:

          Re: VI and earthquakes. The fault in question runs through LA, Seattle and Vancouver.
          No one is known to have actually fallen into an earthquake crevasse. The only way to die in a quake is via falling structure (90+ %) or much less likely mud slide.

          If you knew an earthquake was coming you have one overriding task: get out of a metropolis especially one with high rise buildings.
          There are few more desirable places to be on the West Coast of NA in the BIG ONE than rural VI.

          Re: supply. With all the bridges and overpasses down or in unknown condition supply by water transport is the most reliable. This was the norm in the early days on the coast and a big one will in effect take us back to that time.

      • rj says:

        I can put your apartment building in my pocket.

      • economicminor says:

        When things get bad, renters don’t pay and yet the maintenance, insurance and taxes continue.. and often the payments on your loan.

        There are no sure bets, only good guesses and bad ones.

        When there is so many things leveraged (everyone on the same side of the boat) it doesn’t take a very big correction (wave) to start a tsunami of defaults (and the boat capsizing).

      • Frederick says:

        True the obvious question being where is a “ safe haven” location I’m thinking New Zealand or Fiji perhaps

    • Petunia says:

      The biggest use of gold and silver is jewelry. Most women these days no longer wear real jewelry. They may be too poor or too scared to wear it. Over the long term gold, silver, and diamonds will see a downward trend. Even in the third world, most girls would rather have a cell phone than a gold bangle.

      • Frederick says:

        That may be true in the states but in places like India and here in Turkey I can assure you woman most often are wearing the real thing Wedding Gold is a long standing tradition My wife got pounds of gold bracelets when we got married

    • Frederick says:

      DJ They will thank you for your advanced thinking

  3. Memento mori says:

    Stoping inflation is cery straightforward: STOP printing more money.

    • R Davis says:

      But it’s such a nice thing to have around in abundance.

      • Frederick says:

        No not really We all know that this fiat money scheme will eventually blow sky high and take most people with it Like Dr Ron Paul advocates sound money is the answer

    • Kent says:

      Yes, but that means somebody gets hurt. Because now you either have to raise taxes and take money out of someone’s pocket, or cut spending, which takes money out of someone’s pocket. Then you lose the next election.

      • blindfaith says:

        Somehow the idea that someone should be bailed out for a lack of prudence, is the right thing. It is NOT. Socialism of wreck less debts to the public is part of why we are heading straight into a brick wall just like Turkey and Argentina.

        There is NO excuse for the IMF to be daddy-war-bucks to these countries. If you recall, Argentina has been here before. The last time they refused to honor their bonds and Elliot Management sued them and won That opened the door to bond holders being made whole no matter what. Everything is free, until you have to pay the bill. Some one has to pay the bill.

        Since when is there a guarantee that “you” ( the plural international YOU) will win in this world, unless of course, the whole world adopts socialism. And that my friends is happening fast with plenty of lipstick.

        • sierra7 says:

          I sometimes wonder in our “global” economy (finance) if the “powers that be” can let any country completely go in the toilet without getting bailed out. We are getting so interconnected in so many ways that when a “financial butterfly” flaps it’s wings somewhere in the world, “…..a (financial) hurricane develops”. I don’t think “they” have any more choices left. But, that’s just my opinion.

        • Kent says:


          Countries don’t get bailed out. There wealthy American and European creditors get bailed out. Countries take it on the chin by being forced into austerity.

          And the reason to force countries into austerity is purely a morality play. You don’t want to show the obvious immorality of bailing out creditors who made stupid investments, so you have to make the population look like immoral fools for wanting government programs. And it works like a champ every time.

      • Jim Simmons says:

        Kent nails it.

  4. Sporkfed says:

    I have to wonder if Germany and other European countries with
    large Turkish expat populations will turn the screws by blocking remittances or will the fear of more refugees win out ?

  5. Olivier says:

    Can’t Turkey do a forced currency conversion of at least its household debt, as I think Hungary did a while back? Hungary did that before it had a full-blown crisis on its hands, though.

  6. Tom says:

    Actually the fall of PM’s may be an attempt to restrict an alternative for Turkey to support the lira.

  7. johnnygeneric says:

    I’ve been shorting the Euro using EUO the past couple of months. I expect at the low to make 15%-20%.

  8. KPL says:

    “Instead of trying to…beg the IMF for a bailout, the Turkish government has heaped scorn on the West”

    While this does not help Turkey, I for one am glad that IMF (and indirectly the bond holders) is being asked to go pound sand.

    When you buy debt and it goes sour, you do not go running to mommy. you “suck it up and cope” (as Munger advised the average citizen in 2009).

    I can only hope that Ergodan will continue to hold on till the bond holders are fully screwed. But then the Fed has its QE and ZIRP/NIRP to come running to the bond holder’s aid. As usual, savers, retirees and prudent people will be put under the bus and tax-payers will be asked to bail them out. “Privatize profits (‘juicy yield’) and socialize losses (‘bail them out’) is a way of life all over the world. Fraudsters all of them!

    • Nicko says:

      Not a smart strategy. I’m in Egypt….they went through their own currency crisis a bit over a year ago, devalued 50% in the span of a day. They received IMF bailout, consequence? Inflation spiked at 40%….but has gradually come down to a more manageable 13%, currency inflows and FDI have resumed, the economy is growing at 5.5%, foreign reserves are flush with cash, unemployment is decreasing (albeit not fast enough), nonetheless, the economy is recovering. Turkey can do the same…but the medicine sure don’t taste good.

      • blindfaith says:

        Nicko, with all due respect, it would appear that countries who race down the path of arms purchases without the natural resources to generate the funds to make such purchases, end up in trouble.

        We should all be Swiss. No real natural resources to generate money to buy military arms, and look at their success.

        • Cynic says:

          Switzerland is the exception that no one else can readily emulate.

          Just as the German model cannot be copied by all the states of the EU.

          You have to get there first……

      • Cynic says:

        Nicko: I suppose the lid was kept on things in Egypt by food subsidies?

        What about rents for the common people: subsidised too?

        • Nicko says:

          Everything is subsidized. …but IMF is forcing reforms, energy prices rose 50%. The poor, which account for half the population receive subsidized food and cooking gas. The hard part comes next, the country must continue rapidly industrializing to create millions of jobs.

          Luckily, Egypt made huge natural gas discoveries in the Med that are now online…so there is cash coming in. The reforms must continue, or there will surely be another currency crisis down the road.

      • WSKJ says:

        Right, Nicko, there’s a lot to admire about Egypt. Maybe their will to confront their currency crisis is emblematic of their will to achieve good government ?:

        Looking back to the aftermath of the “Arab Spring”, the Egyptian people decided to move forward as a secular state.

        Looking even further back, from time present, when no current major world leader seems worthy of much respect, we may recognize Anwar Sadat as a great peacemaker in our time.

        So, yes, even without mention of the long-ago great riverine civilization, there’s a lot to admire about Egypt. Hoping the economic pain is not too great- and the extent to which it has been/is being caused, by the Central Bankers’ big experiment, becomes apparent.

  9. R Davis says:

    ‘a construction boom’

    Tangible assets with which to secure future borrowings ??
    In Victoria TRANSURBAN & their tollways are flavor of the decades.
    Only that the minute these roadways are open for business, they are also costing money.
    Power bills
    Online fees
    Regular software upgrades
    Road & equipment, service, maintenance & refurbishments.
    Staff, men & women to run the whole show.
    I venture to guess that there costs ourweigh an profit made.
    It’s a lose, lose, situation.
    Who in their right mind would lend on this basis ??
    Isn’t it all just snakeoil ??

    • R Davis says:

      Our Daniel Andrews, Premier of Vic,, has no money for policing, it has all gone into the TRANSURBAN potluck stew.

  10. Kk says:

    It is all happening in a far away country we know little about. What could possibly go wrong?

  11. aqualech says:

    Some of the comments above about USD prices of gold and silver are tangential or irrelevant to the topic at hand. Any Turk or Argentinian who traded their local currencies for PMs before the devaluation is looking pretty smart right now. THAT is the reason to hold some PMs rather than fiat. Yes, other hard assets would be good also, but some are more vulnerable to taxation than others.

    If you don’t think that a currency devaluation could happen in the dollar, then don’t buy any PMs. OTOH, gold’s return in USD since ~Y2K is not too bad.

    • Petunia says:

      I would think that any Turk or Argentine would be better off buying real estate as a long term bet. If the IMF is giving them money, the asset of last resort they can take is the land.

      • John M says:


        To your point, I was fortunate to employ a former Argentine national. I asked her a couple of years ago how the folks out there coped during the 1998-2002 economic crisis. If you had real estate you got thru was the answer. If you had money in the bank, that was gone. Stolen by the local central bank. Hard assets that are not stolen from you is the answer..


        • Petunia says:

          In South America the dividing line between the haves and have nots is owning their own home outright as well as land somewhere.

    • marc says:

      I wholeheartedly agree with you.
      Same old story the world over decade after decade, century after century. PMs are monetary insurance and everybody needs it (the other one being a mortgage, which is a short on the currency).
      One of my hobbies is to travel to countries where the currency gets decimated.
      This year I did Egypt, Brazil and Argentina. Fly business on the local airline and live like royalty there.
      Lots of fun (not for the locals devastated by massive inflationary shock).
      It already happened a few times to the USD.

  12. economicminor says:

    We need Turkey’s Incirlik air base to prosecute our wars in the Middle East. We use to use Egypt but that relationship went south with the Arab Spring. The one with Turkey has been going bad for a while now. Erdogan is more aligned with Russia and Syria than the west. Our President seems to want to exacerbate our problems with Turkey and Erdogan too. Wonder what the next plan is? Or if there is one?

    Seems like the fires just keep burning.. Diplomacy via Tweeter and verbal abuse wouldn’t work in my life. I would end up alone and depressed. N Korea, Iran, Syria, Russia, Turkey, Argentina, Brazil and on and on. Exports down, imports up and most honest studies show that the average worker’s income hasn’t gone up while inflation has. To much uncertainty and yet stocks seem oblivious?

    The chickens do come home to roost.

    • fajensen says:

      A sneaky way of shutting down the Middle East perma-war without being impeached or Kennedy’ed could be to lose access to those bases.

      It would be nice if it was so, I don’t think it is.

    • Frederick says:

      You forgot access to the Black Sea via the Bosphorus straits That’s something the Russians have coveted for a VERY long time

  13. QQQBall says:

    I wonder those 100-year Argentine bonds are selling at? Wasnt it 8% coupon?

  14. B Wilds says:

    The wild and crazy currency markets should be disrupting the stock market even more than they have but things appear “magically stable” and the question is why. The argument that currencies are trading in a false paradigm extends past simple manipulation and is bolstered by their being sheltered from the storm of volatility by existing in a rather closed system. Wealth is trapped within the current system of fiat money by laws and rules that discourage freedom of movement into more tangible stores.

    It is the coordinated collusion of the major central banks that have allowed this charade to exist. The fact it has not been recognized or acknowledged does not alter nor does it guarantee the system will continue.

    • WSKJ says:

      I saw some subtitle paraphrases from Erdogan on CNBC yesterday in which he gave lots of blame to currency traders for the T. lira currency crisis. Thinking micro (nano ?) now, encouraging Turks to take the gold from under their pillows and exchange for lira, is advocating micro currency-manipulation.

      George Soros apparently made billions off currency trading. What has changed since those days ? The central banks are no doubt more powerful now (above, @B Wilds)

      One still hears about the dark pools. I wonder to what extent currency trading/manipulation/management is involved in the Turkish lira crisis. Not to mention derivatives on the former. Has anyone tried to quantify (ballpark figures OK) ?

  15. Alex says:

    All brought to you by the central banks of the world working with the IMF. Scene Retake 201. Who is making the real money on this???

Comments are closed.