Running head: HISTORICAL OVERVIEW 1

Historical Overview – USA and Turkey

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HISTORICAL OVERVIEW 2

Historical Overview – USA and Turkey

The political process, economical process, and socio-cultural combination are beginning

rapidly in globalization terms. Therefore, one country's changes will probably be reflected in

other nations or regions due to too much interdependence. Historically, Turkey and U.S. have

had a strong connection. They have a common interest in sections such as security, economic

alliance, and stability. The long history partnership between the two countries was put on test in

2018 by a chain of misunderstandings. As we speak, U.S. and Turkey are being faced with a

diplomatic crisis that is great and has never been experienced before. The lira has lost nearly a

quarter of its value against the dollar. Turkey's increase in influencing the role that is regional

and more independent should be considered. There are indications also revealing that the impact

of the crisis is broader.

History of the Turkish Lira

Together with other similar currencies from countries located in Europe and the Middle

East, the lira traces lira origins with the weight unit coming from ancient Rome. The use of the

Roman Libra currency had been introduced across Europe and the neighboring eastern areas,

where they started using it throughout medieval times. The lira from Turkey and the lira from

Italy were used till 2002, the French used the pound till 1794, and the pound from Britain

successors of the ancient currency to the modern times. The TRY currency introduction is

divided into two sections. The first section of the Turkish lira was introduced between the year

1923 and 2005. The section started in the year 2005. Across its history, Turkey's lira was

attached to the French franc, the British pound, and the pegging USD. Although a longer clear

peg is not foreseen, Turkey is trying its best to intervene in the currency markets and looking

forwards to manipulating the value of TRY. In December 2003, the Turkish Grand National
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Assembly enacted some law allowing for the Turkish lira redenomination by removing six

zeroes and bringing onboard a new currency. On January 1, 2005, the new lira was established to

restore the outgoing Turkish lira, whereby one new lire is similar to 1,000,000 of the old lire.

The revaluation caused the revaluation of the Romanian lieu in 2005, and it became the least

valuable currency in the whole world for some time. Additionally, during the same period, the

Turkish Government introduced two notes in denominations of 100 and 50.

Current Turkish Lira

The new notes belonging to the "E-9 Emission Group" were launched on January 1,

2009. The E-8 series was faced off after December 31, 2009, but retained its status of being

redeemable at the central bank branches. The E-9 series notes are called "Turkish lira" instead of

"new Turkish lira." The new currency has been designed in sizes that are varying to prevent

forgery. The latest series's main difference is that each of the denominations displays the iconic

Turkish features instead of the architectural features of Turkey and their geographical locations.

The primary color of the 5 TRY banknote is "purple" in the second group of the current notes. At

the moment, Turkey has banknotes in the denominations of 5 TRY, 10 TRY, 20 TRY, 50 TRY,

100 TRY, and 200 TRY notes which are in circulation added to 1, 5, 10, 25, and 50 kurus coins

and 1 lira coins.

Turkish Lira Exchange Rate Crisis

The depreciation of TRY's exchange rate escalates in the year 2018, whereby the second

week of May it had hit US$4.50/TRY by the following second week in the same month it came

to US$4.90. According to the economists, the quicker loss of value was mainly connected to

Recep Tayyip Erdoğan. They forbid the Turkey Central Bank from making the essential changes

in the interest rate. Notwithstanding the apparent resistance from Erdogan, the Turkish Central
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Bank sharply hiked the interest rates. TRY fell 20% and even more against the U.S. dollar on

August 10, 2018, because of Turkey's economic and geopolitical problems. Apart from the

increasing inflation and the Government's pressure to lower the interest rates, the country began

facing a debt crisis that threatened to bring even more pressure to its currency and economy.

According to the history, the rate of exchange, its state of volatility, and the indirect or

direct influences on the economic indicators are leading the topics that are thoroughly surveyed

for the sake of Turkey's economy. The reason is the essential role of the exchange rate within the

general production, prices, and dynamics of the foreign trade; the banking sector, the

Government, and the firms that operate in the actual sector mainly preferred historical borrowing

funds from foreign countries. The rates of interest in domestic are more significant than the rates

of interest from foreign countries. The foreign currency's total reserves are restricted through the

borrowing of foreign currency, and firms can acquire wealth that is easy but short-term. Foreign

trade, together with its finance, also plays a significant role in the dynamics of foreign debt.

Foreign institutions give firms credit to finance their import needs. Consequently, the growth in

the economy causes the current deficit also to increase. The Central Bank of the Republic of

Turkey (CBRT) monitors the markets for foreign exchange and ensures the Actual Exchange

Rate (REER).

The Turkish lira’s high volatility, when compared to the other currencies, is one of the

historical issues being faced with the Turkey markets. The Turkish lira price is closely monitored

by the entrepreneurs with medium and small-sized in Turkey. The reason is that firms ranked in

high positions are owning currency positions that are high in their financial statements, which

has been negatively influenced by depreciation lira in the near past. During 2002, the foreign

exchange rate level and the volatility came to order by the regime of transformation to the
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exchange rate that is floating. This high rate of volatility and the increase in the rate of foreign

exchange caused some concerns to the SMEs because depreciation of currency simultaneously

and directly increases production costs and alters the costs of export. The SME's credit usage is

another area that has research interest when looking at the Turkish economy. Having changed the

SME definition in 2012, the ratio of credits to the banking sector to SMEs went high, as reported

by the Turkish Banking Regulation and Supervision Agency.

The Turkish Banking Section increased loans from foreigners to SMEs come August of

the year 2013. Almost sixty-four percent of the F.X. borrowed money was extended to medium

enterprises. The firms’ motivation brought about by the F.X. borrowings went high by reducing

the interest rates. The volatile exchange rate and low rate of interest policy had been embraced

up to the year 2010. But immediately end of October 2010, the implementation of new policy

monetary tools like the interest rate corridor and the reserve option mechanism were executed.

The rate of interest became highly volatile, like the volatility of the rate of exchange. In the last

ten years, a substantive amount of short-term capital was present in the Turkish economy.

Because the foreign currency's liquidity was high cause by the atmosphere of low rate of interest,

SMEs preferred borrowing money from foreign financial institutions, which was easy for them.

When Turkish SMEs gained from lending, it caused an increase in their liabilities of the currency

from abroad. The finances belonging to the companies became better by the inflows of capital,

and it was easier to borrow from abroad. The growth of the economy had been positively

affected by the high capital inflows.

Consequently, CBRT became concerned with the volatility of inflows from the capital.

They assumed that the easy borrowing that is short-term could at the same time increase the

volatility and fragility. CBRT began to implement policy measures to stabilize the growth rate,
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the exchange rate, and the current account. The firms’ liability regarding currency from abroad

hiked so fast, which brought concerns to the monetary policy authorities. Come mid-2013, and

the CBRT wanted to reduce the exchange rate volatility by disposing of the currency from

abroad to the Turkish market. In December 2013, CBRT began selling the U.S. dollars to the

market to diminish the exchange rate above 2.15.

The Effects of the Great Recession on the Turkish Labor Markets

The significant effects of the Turkish global crisis of the economy were felt increasingly

from the third quarter of 2008. When the GDP rate of growth decelerated to 0.9%, being an

average percentage for the whole year 2008, it recorded a further decrease of almost 6.8%

compared to the first half of 2009. The adjustment burden heavily fell on the real Turkish

economy, specifically the sectors dealing with industries and the labor market. Output from

industries declined by 24% come January 2009. The unemployment rate secularly rose when

nearing the second half of the year 2008 and dived into a new turmoil in 2009; and finally

retreated to its pre-crisis levels, admitting the notable losses wages and extended to the

formalization of the workplace, which is a significant problem of unemployment.

A Bleaker Panorama.

Currently, Turkey is faced with a bleaker panorama than it was in the last two years.

Their economy is fragile now than it has been before, having already faced one crisis in the year

2018. As we speak, the crisis of the Coronavirus has consumed a considerable amount of money

belonging to the revenue of the nation earned from exports and tourism while the lira that is

plunging is proving difficult, once more for the Government and companies in repaying the

foreign-controlled loans, of which by April 2020 was amounting to thirty-seven percent of

overall debt in the hands of Turkish borrowers. Turkey’s predominance of debts that is foreign-
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controlled a substantial risk for Turkish banks, as warned by S&P. However, some banks in

Turkey belong to the Europeans.

After the CBRT had burnt through foreign-exchange scarce reserves to support the lira,

they had another better option to support the lira by raising the interest rate benchmark. In the

year 2018, the consumer price inflation in Turkey had exceeded 25%, which activated the

currency crisis. And to deal with it, the CBRT had gone ahead and raised the rate of interest,

causing inflation to come back, and come mid-2019, the high inflation was back to almost 8%.

Since that time, inflation began storming to higher heights, and come June, and it hit 12.6%! The

benchmark rate is considerably below the standard rate of inflation, and that is how it has been

for the last six months. It means that the actual interest rates have turned to be highly damaging.

The problem brought up some distress with the investors that are foreigners because if

inflation worsens, the CRBT may not be willing to manage to increase the borrowing costs to

control it. Following the required interest rates, which are already profoundly pessimistic, most

of the investors feel that they are not well rewarded for risking by holding for assets belonging to

Turkey. It has resulted in investors flying out of bond and stock markets in Turkey. From reliable

resources, it was recorded that foreign investors went ahead and removed chunks of dollars from

the local market of bonds early in the year.

Lira reached its lowest point in August 2020 when trading against the U.S. dollar at 7.36,

by losing almost 20% of its worth since the year began. It marked two years since Turkey

encountered a massive crisis of its currency due to the economic penalty forced by the

Government of the U.S. after an American pastor called Andrew Brunson was detained in

Turkey on terrorism levies. After which, the lira stabilized when Turkey's central bank increased

the interest rates by 6.25%. It brought in a quite relatively calm condition, but it was short-lived.
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Since then, the lira has been weak for two years now, and the Turkey economy has been

struggling since then. Turkey's central bank has pumped several billions of dollars to increase the

scarce reserves used for foreign exchange to support the lira. Additionally, it took vast amounts

of foreign money from the local banks, which later sold them out to purchase lira though it did

not help.