A Comparative Analysis of Turkey and Argentina
Finance 351 – International Finance
A Comparative Analysis of Turkey and Argentina
Paper No. 1
3/7/2014
Executive Summary
In our analysis of the Argentinean and Turkish crisis we found that each country’s crisis was caused in different ways but both cases witnessed common mechanisms. When comparing Turkey and Argentina it can be seen that both crises were preceded by a large amount of capital inflows. These capital inflows came predominantly from portfolio investments from US and Europe, and in both cases it these inflows were able to offset the countries’ devaluing currency and current account deficit.1 In both Turkey and Argentina the crisis occurred after a drop in foreign investor confidence and the immediate withdrawal of capital. The countries overreliance on “hot money” created a situation where the two economies relied on the confidence of foreign investors to fund their countries current account deficits.
That said the context of both crises were different between Argentina and Turkey. The Argentinean crisis for example was influenced more by emerging market contagion than the Turkish crisis. In Argentina the devaluation of the Brazilian real greatly hurt the country’s ability to export. With a third of exports destined for Brazil, Argentina’s current account deficit widened and the peso needed to devalue in order to compete with the rest of the Latin American’s devaluating currencies. The Turkish Crisis however, was cause more by its own internal problem than from international contagion. In Turkey the lack of confidence from investors related more so with Turkey’s own political and economic struggles rather than a case of throwing the baby out the with the bathwater. That said it is important to note that Argentina had many difficulties of its own, but also had international contagion effect its crisis more severely.
In our analysis we concluded that the top three factors for each country’s crises were as follows (in no particular order):
A Comparative Analysis of Turkey and Argentina
Paper No. 1
3/7/2014
Executive Summary
In our analysis of the Argentinean and Turkish crisis we found that each country’s crisis was caused in different ways but both cases witnessed common mechanisms. When comparing Turkey and Argentina it can be seen that both crises were preceded by a large amount of capital inflows. These capital inflows came predominantly from portfolio investments from US and Europe, and in both cases it these inflows were able to offset the countries’ devaluing currency and current account deficit.1 In both Turkey and Argentina the crisis occurred after a drop in foreign investor confidence and the immediate withdrawal of capital. The countries overreliance on “hot money” created a situation where the two economies relied on the confidence of foreign investors to fund their countries current account deficits.
That said the context of both crises were different between Argentina and Turkey. The Argentinean crisis for example was influenced more by emerging market contagion than the Turkish crisis. In Argentina the devaluation of the Brazilian real greatly hurt the country’s ability to export. With a third of exports destined for Brazil, Argentina’s current account deficit widened and the peso needed to devalue in order to compete with the rest of the Latin American’s devaluating currencies. The Turkish Crisis however, was cause more by its own internal problem than from international contagion. In Turkey the lack of confidence from investors related more so with Turkey’s own political and economic struggles rather than a case of throwing the baby out the with the bathwater. That said it is important to note that Argentina had many difficulties of its own, but also had international contagion effect its crisis more severely.
In our analysis we concluded that the top three factors for each country’s crises were as follows (in no particular order):