Turkey in Crisis: Why Raising Interest Rates Could Save Emerging Markets

Turkey just raised its interest rates. Find out why the move could help stop a budding emerging-market financial crisis.

Feb 2, 2014 at 11:11AM

Stock markets around the world have been volatile, as crises in emerging-market countries like Turkey and Argentina have raised global concerns. Yet Turkey took the extraordinary step of raising interest rates. Will doing so reverse the plunge in the iShares MSCI Turkey ETF (NYSEMKT:TUR), which has even caused broader-based damage to emerging-market ETF Vanguard FTSE Emerging Markets (NYSEMKT:VWO) and iShares MSCI Emerging Markets (NYSEMKT:EEM)?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, goes through why Turkey raised interest rates and how it could help prevent a crisis. Dan notes that the Turkish currency recently fell to record lows against the U.S. dollar, causing capital flight out of the country and threatening Turkey's economic stability. Raising rates gives investors more incentive to keep money in Turkey, but Dan notes that similar intervention efforts in other countries have had mixed results. Dan concludes that it's uncertain that the move will help Turkey avoid a crisis, but that it makes sense to give it a try.

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Dan Caplinger owns shares of Vanguard FTSE Emerging Markets ETF. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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