Turkey’s beleaguered lira was the world’s worst-performing currency March 22, down almost 6% against the US dollar on the day as of 1:00 pm New York time. More ominously, the cost of insurance against a Turkish sovereign default on foreign-currency debt surged from 350 basis points over the short-term rate to 400 basis points, and Turkish bank stocks lost 5% to 7% of their value on the Istanbul stock exchange.

Turkish residents reportedly are hoarding dollars in anticipation of another devaluation. They bought $4 billion of dollars in the week ended March 15, and Turkey’s private banks have stopped supporting the national currency, leaving the central bank alone to slow the currency’s fall. The country’s foreign exchange reserves fell by $6 billion to $28 billion during the week ended March 15, as the country’s central bank sold dollars in a vain effort to stabilize the lira.

I wrote on March 11:

“The market I love to hate (and love to short) is Turkey, the worst-performing economy in the OECD.  The country is officially in recession, with negative GDP growth year-on-year of 2.4%. With industrial production down 10% year on year and inflation at 20%, Turkey seems ripe for another big devaluation. Currency depreciation between 2013 and today reduced the value of the Turkish lira by 2/3, from 1.8 to the dollar to 5.4, and it seems likely that Turkey will revisit the 7 to the dollar exchange rate of August 2018. Turkish households have slid into a debt trap that will force them to cut spending in order to repay existing credit card and mortgage debt.”

President Recep Tayyip Erdogan built an economic boomlet on foreign debt. Turkey runs a chronic current account deficit currently equal to about 4% of GDP, the result of a consumer credit bubble that encouraged Turkish households to buy imported consumer goods on credit. That came apart early in 2018 as the Turkish currency collapsed to nearly 7 to the US dollar before stabilizing at slightly over 5 to the dollar. Now the Turkish lira has begun to retrace its path back to 7 to the dollar.