Question

Turkey is a surprising addition to the list of rapidly developing economies; with a GDP increase of 8.5% in the year 2011 alone. However, such rapid growth leaves worries regarding possible side-effects. For instance, in 2011 Turkey's rate of inflation was well above that of its peers. Secondly, there is increasing concern regarding Turkey's growing dependency on foreign capital. A large portion of the Turkish banking system is part-owned by banks within the Eurozone. As the single currency falters, such a dependency raises questions about the stability of Turkish growth.

As Turkish banks are part-owned by those in the Eurozone, they may suffer if the European banks face financial difficulty.
A.True
B.Probably True
C.More Information Required
D.Probably False
E.False

Answer 1

The correct answer is B. Turkish banks, partly owned by those in the Eurozone, are at risk if the Eurozone banks struggle financially. Turkey's practice of borrowing in foreign currencies and historical defaults creates heightened risks for its banking sector. The assertion is probably true.

Step-by-step explanation:

Given Turkey's economic situation where banks borrow money in a widely used currency like the U.S. dollar or Euro, and then convert these to the Turkish lira, there are significant risks if the value of the lira depreciates. Extreme budget deficits mean that aggregate demand may lead to high inflation, and the fear of not repaying debts may deter international investors. Turkey's history of defaulting on loans, such as the six times in the last 175 years, raises concerns for foreign investors about the return on their investments. Should the European banks face financial difficulties, Turkish banks partially owned by these Eurozone banks could indeed suffer due to their dependency on foreign capital.

The claim that Turkish banks may face instability if European partner banks encounter financial trouble is Probably True, as any depreciation in the Turkish lira would make it hard for these banks to repay international loans denominated in stronger currencies.