WHY TURKEY´S TRIALS ARE RIPPLING INTO EUROPE / THE WALL STREET JOURNAL

Why Turkey’s Trials Are Rippling Into Europe

Emerging-market currencies aren’t the only ones affected by Turkey’s crisis

By Richard Barley

The plunge in the Turkish lira hasn’t just rippled into other emerging markets: It is also putting an unwelcome spotlight back on the euro.

The European currency has been trapped for nearly three months in a relatively narrow range between $1.15 and $1.18. But it has now broken downward to $1.138, its lowest level for more than a year, as the collapse in the lira—now down 45% this year against the U.S. dollar—has accelerated. The Turkish central bank has taken measures to provide liquidity but hasn’t delivered the big interest-rate rise that might start to calm markets. 
Why should the euro be affected? First, there are concerns about European bank exposure to Turkey. The Euro Stoxx Banks index fell 3.7% last week to its lowest since late 2016, although analysts believe the exposure isn’t big enough to cause systemic worries.


Second, Turkey’s troubles have sapped risk appetite, hitting southern European government bonds: The 10-year Italian yield is back above 3% again. That adds to nerves as the new Italian government develops its budget and investors await word from ratings firms. These may yet downgrade Italy’s credit standing in the coming months.







The Turkish lira dropped against the U.S. dollar on Monday, and also affected the euro. Photo: Mustafa Kaya/Zuma Press 


Finally, there is global monetary policy. The European Central Bank’s forward guidance, which says it will hold rates steady through the summer of 2019, has disconnected the euro from pressure to appreciate on stronger economic data, but doesn’t prevent it from falling if risks emerge. Meanwhile, the Federal Reserve is focused on the strength of the U.S. economy, and has shown little concern about the effects of higher U.S. rates on global markets.

The euro could fall further: Société Généralethinks it could hit $1.10. Because the euro’s weakness can trigger concerns about Europe’s vulnerabilities, it isn’t a welcome development. It isn’t just emerging markets waiting for Turkey to act.