The ongoing Turkish meltdown certainly looks scary: Investor fears that the crisis could spread to other emerging markets are battering stocks from Europe to Asia.
But even as decisions from Washington have helped fuel the mess, it presents only limited danger to American business interests. The United States trades a relatively skimpy amount with Turkey, and U.S. banks likewise don’t have much exposure there.
That gives President Trump a freer hand escalating his confrontation with Turkish President Recep Tayyip Erdogan over the jailing of Andrew Brunson, an evangelical American preacher.
Unlike Trump’s other trade showdowns, in which he’s aiming to extract economic concessions, his fight with Turkey centers on the preacher’s case — suggesting the president is increasingly willing to use trade leverage to accomplish diplomatic goals. And in Turkey's case, there appears to be little immediate downside for the U.S. to doing so.
Trump accelerated the decline of the Turkish lira last Friday when he announced his administration will double tariffs on imports of Turkish steel and aluminum, drawing a complaint from Erdogan that the United States is waging “economic war” on his country. Yet unlike the European Union, China, Canada and Mexico — key trading partners in a position to inflict pain on a broad array of American businesses as Trump dials up tariffs — Turkey bought 0.6 percent of the goods the United States exported in the first half of this year. The country ranks 28th among foreign markets for U.S. goods and 33rd as a source of imports, according to U.S. Census data.
And when it comes to banks, European outfits have a lot more to worry about. As Ian Shepherdson, Pantheon Macro’s chief economist, wrote in a note to clients Monday, U.S. banks’ claims on the country totaled $38 billion at the end of the first quarter this year, “not much more than claims on Finland and just 0.6 percent of all cross-border claims. Even if all these claims were to be written off — they won’t be — the impact on the U.S. banking system would be minimal.” By contrast, Spanish banks alone are owed more than $82 billion.
Here’s how U.S. banks’ exposure to Turkey compares to other countries, via Pantheon:
Trade between the two NATO allies largely leans on military spending: The United States buys about a third of Turkey’s defense exports, and American companies similarly supplied more than a third of the country’s $1.54 billion in defense imports last year. But the defense authorization bill that Trump signed Monday blocks Turkey’s purchase of F-35 jets, made by Lockheed Martin — unless Erdogan’s government drops charges against Andrew Brunson, an American pastor it has accused of espionage, as well as plans to buy a Russian air defense system.
“The mood on Capitol Hill is so ugly, there aren't too many senators willing” to make a case for containing trade tensions with Ankara at the moment, Bulent Aliriza, director of the Turkey Project at the Center for Strategic and International Studies, tells me.
Indeed, when Lockheed executives gathered in Fort Worth, Texas in June to deliver the first F-35 to Turkish officials, members of state’s congressional delegation were conspicuously absent from the ceremony. “The controversy over Turkey's courting of Russia seemed to put a bit of a damper on Thursday's proceedings, although none of the dignitaries or guest speakers spoke aloud about it,” the Fort Worth Star-Telegram noted at the time.
Erdogan is insisting Trump's hard line will force him to find allies elsewhere. “Before it is too late, Washington must give up the misguided notion that our relationship can be asymmetrical and come to terms with the fact that Turkey has alternatives,” he wrote over the weekend in a New York Times op-ed. And Erdogan has worked to bolster ties to Russia, China and Qatar, as The Washington Post's Rick Noack writes.
Yet Erdogan is likely overstating his options. “It would be very difficult to change course, because Turkey is so integrated into the Western system,” Aliriza says. Indeed, Turkey's crisis initiated in Washington and could well end in Washington, too. The country is in dire straits because it over-borrowed dollars to try to juice economic growth, a tab it is struggling to cover now that the Federal Reserve is raising interest rates, as my colleagues David Lynch and Kareem Fahim explain.
And many analysts see it as inevitable that Erdogan seeks a bailout from the International Monetary Fund, a half-mile north of the Fed. “There aren’t many alternatives to the IMF,” Mohamed A. El-Erian, chief economic adviser at Allianz, writes for Bloomberg. “Other European governments and institutions aren’t likely to step up with anything that would materially alter Turkey’s funding needs. The same is true of most Gulf countries. China, while less burdened by political issues, is unlikely to engage quickly on the scale required. And the closer political ties with Russia, including a publicized call on Friday between [Erdogan] and Vladimir Putin, is unlikely to deliver much in terms of cash flow.”
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— U.S. reaps $1.4 billion from metals tariffs. CNBC's Stephanie Dhue and Kayla Tausche: "In less than five months, the Trump administration has collected more than $1.4 billion in new revenue from steel and aluminum tariffs, according to a recent report prepared for members of Congress. The Congressional Research Service estimated that, between March 23 and July 16, the U.S. reaped $1.1 billion and $344.2 million from levies on foreign steel and aluminum, respectively. Those earnings are on the rise as trade negotiations with allies linger on and [Trump] moves to hike tariff rates on countries like Turkey."
— Trump's Harley boycott roils Wisconsin GOP. AP's Scott Bauer: "Wisconsin Gov. Scott Walker and Republican U.S. Senate candidate Kevin Nicholson both came out Monday against boycotting Milwaukee-based Harley-Davidson, the day after [Trump] said it would be 'great' if there was a boycott. Trump’s Sunday tweet forced Walker and other Republicans to take a position on the sticky political issue involving an iconic Wisconsin company just ahead of Tuesday’s primary where Trump allegiance has been a central focus... Walker, Wisconsin’s most prominent Harley owner, faces a tough re-election bid in November. He tweeted Monday afternoon that 'of course I don’t want a boycott of Harley-Davidson.' That came after Walker initially on Sunday did not directly address the boycott call."
From the NYT's Jonathan Martin:
This is quite a glimpse of the loyalty tests Trump is introducing in primaries. Wisc candidates so worried about offending his base they won’t even stick up for Harley unless pushed. And even then add on a: to be sure...https://t.co/Dyfo1Pmd9l— Jonathan Martin (@jmartNYT) August 13, 2018
— German growth picks up. Bloomberg: "Germany’s economy looks to have found its feet again after an apparent shaky start to the year, suggesting some of the worries about the outlook may have been overdone. Delivering on its role as driver of the region’s expansion once again, it recorded growth of 0.5 percent in the three months through June -- better than forecast -- and its first-quarter performance was revised higher. That keeps solid momentum in the euro area’s largest economy even as companies navigate persistent trade tensions... While solid domestic demand in Europe’s largest economy has shielded the region so far from the worst effects of global trade tensions, companies are increasingly concerned about the outlook."
— Warning signs in Chinese economy. The Wall Street Journal: “China’s economy continued to show signs of cooling, with fixed-asset investment slowing to a nearly two-decade low for the first seven months of the year as trade tensions with the U.S. escalated. Spending on factory machinery, public-works projects and other fixed-asset investments in China’s nonrural areas grew 5.5% in the January-July period from a year earlier... Unemployment ticked up to 5.1% last month, from 4.8% in June... The data suggest that China can’t go toe-to-toe in retaliating against U.S. trade levies, said Shuang Ding, an economist with Standard Chartered Bank in Hong Kong."
Penny Pritzker to China: You helped elect Trump. The former Commerce Secretary writes in Bloomberg that the country has drawn the anger of American voters by "consistently violating its international commitments and tilting the playing field to advantage Chinese firms. Economic complexities aside, the fact that Americans were, in part, paying the bill for such behavior had begun to sink in with millions of my fellow citizens. Candidate Trump, of course, didn’t create these imbalances; he was simply very effective at tapping into this growing resentment... But, if China doesn’t change its approach to economic competition, I fear that today’s trade war will be nothing compared to the heightened tensions to come. Frankly, our domestic political system will demand action and President Trump will look like the mild first incarnation of a trend rather than an outlier."
— Russia to boost state investment. Bloomberg News's Andrey Biryukov: “As the U.S. tightens the noose of sanctions, Russia’s new plan to rewire its economy is counting on old-style state-led investment to drive growth rather than consumers. President Vladimir Putin’s government wants to double the country’s total capital spending in ruble terms by 2024, under a blueprint published by the Economy Ministry. That would bring its share to a quarter of gross domestic output from 21 percent now, a pace of growth that’s more than twice the increase it envisions for retail sales. With the economy starved of foreign capital after years of Western sanctions and likely facing more, the pivot to state-led spending is putting the consumer in the cross-hairs. Taking a page from China’s playbook a decade ago, when it turned to investment to power economic growth, Putin is preparing for a dramatic shift after delivering the biggest consumer bonanza in his country’s modern history during the oil boom years.”
— Marijuana industry under threat. CNBC's Jessica Dickler: “If a full-blown, tit-for-tat U.S.-China trade war erupts, a slew of consumer goods could be subject to as much as 25 percent in tax. On the hit list: imported, Chinese-made vaping devices. . . . Much of the cannabis and cannabis concentrates on the market today are grown and sold in the U.S., but the devices used to consume them are manufactured in China, according to Arnaud Dumas de Rauly, co-CEO of The Blinc Group, a vapor and cannabis incubator, and treasurer for the Vapor Technology Association. Those devices can cost anywhere from $50 to $500, depending on the type. . . . Companies that import vaping products will have to either absorb the additional cost of the tariff, source production in another country or increase the prices charged to consumers.”
- “FBI agent Peter Strzok fired over anti-Trump texts.” The Washington Post's Matt Zapotosky.
- “Prosecution rests after two weeks of testimony in Manafort case.” The Post's Rachel Weiner, Lynh Bui, Michael Kranish and Devlin Barrett.
"Mueller Is examining Roger Stone’s emails." Mother Jones.
- “U.S. judge allows Mueller case against Russian company to proceed.” Reuters.
- “Kushner’s ties to Russia-linked group began with Kissinger lunch.” Bloomberg News's Caleb Melby, David Kocieniewski and Gerry Smith.
— Fed unlikely to change plans. Bloomberg News's Rich Miller and Jeanna Smialek: “Don’t count on a Powell Pause. That’s the message seasoned watchers of the Federal Reserve have for any investors hoping that turmoil in Turkey and the wider emerging-market selloff would stay the hand of Chairman Jerome Powell from raising interest rates. While international developments did cause the U.S. central bank to hold back in 2015 and 2016, there are big differences between now and then. U.S. unemployment was higher and underlying inflation was lower. But perhaps more importantly, the nexus of the turbulence was China, whose economy is the world’s second largest and more than 10 times the size of Turkey’s. 'The broad conclusion from history is that the U.S. can generally ignore what happens in emerging markets, unless it involves China,' said Michael Gapen, chief U.S. economist at Barclays Plc and a former section head at the Fed Board in Washington.”
— CBO predicts 3.1 percent growth this year. The Post's Jeff Stein: "But the robust run of growth may stall as early as next year, with the U.S. economy expected to slow down in 2019 and during the following decade once temporary government policies expire, according to the nonpartisan CBO’s report. Economic growth will slow to 2.4 percent in 2019 and to 1.7 percent in 2020, staying at about that level over the next decade, the CBO projected."
Small business optimism climbs. Bloomberg: "A gauge of optimism among U.S. small-business owners increased to the second highest on record as companies benefited from tax cuts and robust consumer demand, a National Federation of Independent Business survey showed Tuesday. Small-business sentiment is near a record as the economic expansion enters a 10th year, indicating that consumers and businesses will help power growth in the third quarter."
— British currency could suffer. Reuters's Tommy Wilkes, Ritvik Carvalho and Tom Finn: “Having sunk to 13-month lows, sterling could fall by up to another 10 percent in the coming months should Britain crash out of the European Union without a deal on future trade ties, luring more speculators to bet against the currency. Sterling lost almost two percent last week just as British holidaymakers were heading off for some overseas sun. The latest move lower was kickstarted by trade minister Liam Fox's warning that, with Britain less than eight months from its scheduled EU departure date in March, there was a 60 percent chance of leaving without a deal.”
— Musk elaborates on his tweet. The Post's David J. Lynch and Drew Harwell: “If Saudi Arabia ultimately does provide the multibillion-dollar financing needed to take Elon Musk’s Tesla car company private, it would represent the boldest move yet in the kingdom’s campaign to build a post-oil future. The Saudi Public Investment Fund (PIF), a sovereign wealth fund that manages about $230 billion, is the main source of funding under Musk’s buyout plan, the billionaire businessman said in a blog post Monday. 'Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction,' Musk wrote. 'I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving.'”
Rapper Azealia Banks: Musk is scrambling for investors. Business Insider's Kate Taylor: "Azealia Banks lit up the internet after saying in her Instagram Stories that she was at Elon Musk's house for the weekend... When Business Insider reached out to Banks via Instagram direct message, Banks shared further details... Over the course of the weekend, Banks said, the couple essentially went into hiding as Musk — who had tweeted earlier in the week about plans to take Tesla private and said funding was 'secured' — sought funding... Banks said Musk seemed distracted over the weekend. 'I saw him in the kitchen tucking his tail in between his legs scrounging for investors to cover his ass after that tweet,' she said."
— Bayer stock swoons. The Post's Rachel Siegel: “Bayer’s stock slumped about 10 percent in midday trading Monday, three days after a California jury awarded $289 million to a former groundskeeper who said the popular weedkiller Roundup gave him terminal cancer. The stock drop sent a cautionary signal to the company that in June acquired Monsanto, the maker of the weedkiller, for $63 billion. The merger created the world’s largest seed and agrochemical company, marrying Monsanto’s dominance in genetically modified crops with Bayer’s pesticide business. Bayer’s portfolio also includes pharmaceuticals with household brands such as Aleve and Alka-Seltzer. The verdict poses a new challenge for Bayer in its quest to combat contempt swirling around Monsanto by consumer, health and environmental advocates.”
— Icahn backs off Cigna-Express Scripts deal. WSJ's Cara Lombardo: "Carl Icahn no longer plans to solicit votes from Cigna Corp. shareholders against the health insurer’s $54 billion deal to buy Express Scripts Holding Co. after two proxy-advisory firms recommended shareholders support the deal, the billionaire activist investor said in a statement Monday. Significant shareholder overlap between the two companies, which he initially hoped had decreased since the deal was announced, was also a factor in his decision, he said."
— Where's the Wells outrage? American Banker's Victoria Finkle: "Earlier this month, Wells Fargo disclosed that it had mistakenly foreclosed on hundreds of homes over a five-year period. And yet, where was the outrage? The announcement was just the latest in what’s amounted to a two-year streak of bad news for the bank, dating to its first admission regarding its phony-accounts scandal in September 2016. But unlike the storm of criticism directed at the bank nearly two years ago, which resulted in a change of CEOs at Wells, the media reaction to the most recent revelation was barely a blip. And the bank’s stock price has been unaffected; Wells’ share price has dropped just 1.7% since the foreclosure-related news. As the negative headlines pile up, a question arises: Has Wells fatigue set in?"
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