The Global Default: How Turkey Could Trigger the Next Debt Crisis

The Global Default: How Turkey Could Trigger the Next Debt Crisis

It appears you can have one fifth of your country’s assets in gold and still go broke…

That’s the precarious position Turkey finds itself in.

In the past year, Turkey has purchased 205 tonnes of gold to add to its foreign reserve tally.

It now sits on 582 tonnes of gold worth nearly AU$34 billion. As of last month, 22% of Turkey’s total AU$153 billion foreign reserve was in gold.

That’s fairly impressive by international standards.

But there’s a problem. It turns out you can have all the gold you want and still default on your debts.

Let me explain…

Even though the Turkish government has spent the past year accumulating large amounts of gold, even this may not be enough pay back hundreds of billions in US dollar-denominated debt.

In 2015, Turkish President Recep Tayyip Erdogan encouraged citizens to buy gold and ditch the US dollar.

The appeal to nationalism worked. Citizens across the country swapped over 2.47 tonnes of gold for gold-based Turkish bonds.

A well known anti-US dollar proponent, Erdogan then told his people to cash in their euros and dollars, swapping fiat currencies for gold and Turkish liras.

Again, it worked. People dumped their foreign currencies in favour of gold and lira. It spurred private gold buying too. Gold imports jumped 688% over the course of 2016, amounting to AU$17 billion.

The patriotic appeal bought the country some time. It enabled the government to strengthen the banking system without having to buy physical gold itself.

By 2017, however, Erdogan was singing a different tune.

The Central Bank of the Republic of Turkey began buying gold by the tonne once more. Although this time the government claimed it was a diversification policy — a way of ditching the US dollar. Erdogan explained that gold was worth more to Turkey than fiat dollars ever would be.



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