POSITION PAPER OF THE KINGDOM OF SPAIN

TOPIC A: TURKEY’S CURRENCY AND DEBT

CRISIS
ECOFIN – VIANUMUN 2019

1.Introduction
Turkey’s currency and debt crisis consists of the Turkish lira losing its value by more than
35% against the U.S. dollar. Turkey is relying heavily on foreign currency loans, a fact which
may cause the country’s economy to affect other emerging markets. Although Turkey has had
one of the fastest growing economies in the last years, it seems that this success reached its
decline when the country’s borrowing resulted in deficits in both its fiscal and current
accounts. The International Monetary Fund stated that Turkey’s foreign currency debt now
stands at more than 50% of its GDP.
Civil war broke out in Syria, and Turkey was on the frontline. In late 2015, Turkish forces
shot down a Russian fighter, but ties with Russia were repaired, at the expense of Turkey’s
alliance with the U.S., which began to break. Following the coup attempt in Turkey, U.S.
President announced via Twitter a doubling of steel and aluminum tariffs on Turkey, as
Washington pushed Ankara to release pastor Andrew Brunson, who was being held on
terrorism charges. Following the announcement, the lira plunged as much as 20 percent
against the dollar and that is when the crisis officially began. Later, Erdogan released his plan
to buy S-400 missiles from Russia and, despite Turkey being a NATO member, refused to
step back from the purchase. Washington DC has threatened to impose CAATSA (Countering
America’s Adversaries Through Sanctions Act) economic sanctions against Turkey. Turkey
doubled tariffs on some imports from the U.S. (passenger cars, alcohol, tobacco).
President Erdogan accused that U.S. sanctions helped tip the country into the currency crisis,
a fact that is agreed by experts. The president's framing of the economic crisis as a foreign
plot to weaken the state is proving effective in manipulating people into building nationalist
fervor, which sends to other acts of manipulation conducted by Erdogan. The president’s
misunderstanding of basic economics and undermining of the independence of the central
bank created concerns. Experts say that his influence over the country’s central bank has
undermined investor confidence and that, if the central bank had been left on its own, Turkey
wouldn’t have gotten into the current predicament
2. Past taken actions
Turkey tried to find solutions to end the monetary crisis, even though some of them proved to
be either unsuccessful or bad-thought. Erdogan’s son-in-law (the Minister of Finance) failed
to convince investors of an economic rescue and of the government's plans to overhaul the
economy, in Washington DC. The president has also called on Turks to sell their dollars and
euros to shore up the national currency and has said he’s in favor of lower interest rates to
continue driving growth. The central bank vowed to provide banks with "all the liquidity they
need", the Industry Ministry announced the activation of $1.2 billion for the Turkish industrial
production and the government has set up a Credit Guarantee Fund. Some countries have
come to Turkey’s help: Qatar Emir Sheikh announced the $15 billion investment in the
country's financial markets and banks and China provided the country with $3.6 billion for the
“Belt and Road” Initiative.
3. Turkey’s debt to Spain
The debt most at risk in a currency crisis is that which is borrowed in foreign currency.
Spanish bank BBVA (Banca Bilbao Vizcaya Argentaria) controls 49.9% of Turkish bank
Turkiye Garanti Bankasi. Turkish residents owe Spain about $83 billion, which has left
BBVA exposed slightly more to lira debt than to credits issued in dollars, euros, or other
foreign currency and, also, vulnerable to Turkey’s free-falling currency. In the worst-case
scenario, Spain’s biggest bank would be forced to write off completely its local operations or
exit the country.
4. Spain’s opinion on the matter
The Kingdom of Spain believes that the problems that are now affecting Turkey’s economy
are caused by the mistakes made by President Erdogan, regarding both the U.S.-Turkey
relationship and his ever-growing power of the central bank.
Spain is starting to think that President Erdogan is abandoning Turkey’s traditional Western
alignment. He should be careful to not stir any more anti-NATO sentiments, and only so may
the international community and President Erdogan find consensus. Despite the frayed U.S.-
Turkey relationship, the crisis has not affected Turkey’s integration in the international
community, but President Erdogan’s actions have.
The Kingdom of Spain suggests that more radical steps would be needed, such as putting
Turkey’s interest rates up by 750 points to save its economy. If the situation worsens, the
country would have to find other ways to finance its debt, including taking out a loan from the
IMF (International Monetary Fund). Unfortunately, Ankara will likely look for financial
assistance from sources other than the IMF, including China, Qatar and Kuwait (countries
that, in the end, would stand to benefit from the crisis).
At this moment, after banks suffered losses of huge amounts of dollars, Spain would not
really encourage its citizens to invest in Turkey. We are worried about the issues in Turkey
causing damage in markets in our country and we are calling for a bank recapitalization
program to be financed by taxpayers and shareholders. Businesses are concerned about higher
import prices, too.
To conclude, the Kingdom of Spain is willing to do anything to stop the ongoing Turkish
crisis and to recover its money from the Turks’ loans.