Last Friday the Turkish currency, the lira, crashed spectacularly, dropping as much as 16% relative to the dollar – it lost a third of its value in just one week. By Monday morning the world’s central bankers and financial institutions were suddenly waking up to the carnage that the collapse of the lira means for capitalism.
The economic crisis that is laying waste to Turkey is not some localised problem and Turkey is not an insignificant little country. With a population of 80 million, its economy is four times greater than Greece, while its geopolitical importance in the region has long been recognised by the imperialist powers who have courted its president Recep Tayyip Erdogan as an ally in the imperialist war against Syria.
Now this former ally is posing the greatest threat to the stability and future of the world’s banks.
This became clear on Monday morning when shares in European banks fell dramatically as traders feared ‘contagion’ from the collapse of the lira would inevitably hit them, as they hold huge sums of Turkish debt that will never be repaid.
Right in the firing line are Spanish banks that hold $82.3 billion of Turkish debt, followed by France with $38.4 bn, the UK holding $19.2 bn, the US $18 bn, Germany $17.1 bn and Italy with $16.9bn. With the European banks already teetering on the brink of bankruptcy, a default on their dollar loans by Turkish companies and banks would collapse the whole lot – hence the panic that is dominating not just the financial but also the front pages of the bourgeois press yesterday.
Their panic is understandable. Turkey is no isolated case. The country, in the words of one financial analyst, it is ‘the canary in the coal mine’ – a portent of what is rapidly emerging in countries across the world as the huge capitalist debt crisis erupts with wave after wave of corporate bankruptcies leading to banks themselves going bust. In order to try and stave off complete collapse of the banks in 2008, central banks in the US and Europe flooded the world with paper dollars and euros, augmented by a policy of near-zero interest rates.
All this cheap money was lapped up by nations and companies, who gorged themselves on debt overwhelmingly in US dollars instead of their own currencies. This has created a huge international financial bubble – according to the Institute of International Finance corporate debt in foreign currencies (mainly dollars) stands at a record breaking $5.5 trillion.
In an effort to deflate this bubble before it explodes, the central banks of the US and Britain have started to slowly increase interest rates. The Fed increased rates by 0.25% last November. The effect of this attempt to avoid a debt bubble explosion has been to cause still another debt crisis, as these corporations and nations that borrowed trillions of dollars now find they cannot afford to pay even the small 0.25% increase making it impossible to service these debts and driving them to default and leaving the banks with nothing but a mountain of bad debt they cannot recover.
So entwined is the capitalist banking system, that a failure in Turkey is quickly being felt across Europe and reaching the US, whose banks are also exposed not just to Turkish debt but to the debt of the EU banks. In 2008, the collapse of one comparatively small investment bank, Lehman brothers, brought the entire world banking system to the point of extinction.
Capitalism could not solve this crisis but only postpone it through creating an even bigger debt crisis and imposing the most savage austerity cuts on the working class in every country. This latest stage in the world crisis of capitalism is much deeper than that of 2008, with the capitalist class attempting to place the burden of collapse again on the working class with even greater savagery than we have seen. This will enormously revolutionise workers across the world as they realise that capitalism has reached the end of the road and that the only way forward is to overthrow it through socialist revolution.
