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On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Consulting Director Sophie Antal Gilbert discussed the Turkish financial crisis, its impact on emerging markets and whether or not the turmoil could disrupt U.S. markets.

Significant market volatility still a risk as Turkey grapples with crisis

Turkey’s currency crisis is largely a result of its overheating economy, Eitelman said, noting that the nation is running a 6% current account deficit as a share of its gross domestic product (GDP). “Essentially, what this means is that Turkey is very reliant on foreign money to sustain growth—which in turn makes the country very vulnerable to changes in investor sentiment and capital outflows”, he explained. Recent strains in the country’s relationship with the U.S. have helped spark a flight of capital assets, Eitelman said.

There were a few positive developments in the situation the week of Aug. 13, he noted, including the Turkish central bank’s announcement that it would step in to provide liquidity to domestic banks. In addition, Turkey has also been attempting to clamp down on the ability of investors to short the Turkish lira—a resolution which has stemmed capital outflows a bit, Eitelman noted. “Collectively, I believe these developments probably don’t go far enough in solving the fundamental economic issues in Turkey”, he stated, adding that aggressive interest rate hikes are probably needed to get a better handle on the situation. In addition, Eitelman noted that the Aug. 16 threat of additional sanctions against the country by the U.S. has served to sour the mood again.

“All things considered, we’re probably not out of the woods yet as it relates to Turkey, as the potential for significant volatility going forward remains,” he concluded.