The plunge in the value of the Turkish currency is a sign of escalating tension with the US. But it may also indicate a coming economic storm that could hit many more countries and wreck millions of lives.
The Turkish lira lost a fifth of its value against the dollar last week and has fallen more than 40 percent since the start of the year.
This means that Turkish banks and firms that have debts in dollars now have to repay far more in lira to meet the same amount. It also means that Turkey’s debts—which are valued in dollars—soar in terms of the lira.
The immediate issues behind the collapsing currency are US government tariffs against Turkey and increasing conflict between the two governments.
US president Donald Trump has ordered a doubling of tariffs on Turkish steel and aluminium.
Trump doesn’t mind Turkish president Recep Tayyip Erdogan imprisoning his opponents and murdering the Kurds. But he doesn’t approve of Turkey refusing to follow the US’s demands.
Tension has been rising ever since the US allied with Kurdish forces in northern Syria in order to defeat Isis. Turkey sees these Kurdish forces as its mortal enemy and has moved closer to Russia and China.
In the last week Erdogan has stepped up rhetoric against the US saying, “Don’t forget, if they have their dollars, we have our people, our god.” He promised “economic war”.
Another issue angering Trump is the Turkish detention of US evangelical pastor Andrew Brunson. He is accused of supporting the 2016 coup against Erdogan and faces up to 35 years in prison.
The outcome of all this may be that Turkey detaches itself further from its Nato allies.
The international editor of the Financial Times newspaper last week wrote that the latest fallout was a “poisoned cherry on a rotting cake”. He added that Turkey “is already the third leg of a new power tripod in the Middle East with Russia and Iran”.
However, the Turkish regime is also looking at ways to remake its relationship with the US and the European Union. On Monday Turkey’s finance minister—who happens to be Erdogan’s son-in-law—promised a host of neoliberal measures in an effort to calm the markets.
But there are wider questions which could prove even more important. One is that some European banks have lent large amounts to Turkish financial institutions, companies and the government.
Spanish banks have loaned Turkey around £65 billion. If Turkey crashes then those banks could be in trouble.
More generally the US decision since 2015 to gradually raise its central bank interest rates is hitting weaker economies hard. Investors seeking easy profits will shift money from countries such as Turkey to the US if it offers a higher return and the safety of a powerful country.
Any aggravating factor—such as trade wars or a row with the US—can then see panic and a stampede to move money.
The South African, Indian and Indonesian currencies were all beginning to fall at the start of this week.
The leading US economist Paul Krugman wrote last weekend that the Turkish lira plunge was a re-enactment of the Asian financial crisis of 20 years ago.
That saw millions of people lose their jobs as companies collapsed and production plummeted.
Krugman wrote, “Loss of confidence causes your currency to drop. This makes it harder to repay debts in foreign currency. This hurts the real economy and further reduces confidence, leading to a further decline in your currency and so on.
“If there is no effective policy response, the currency drops and debt measured in domestic currency balloons until everyone who can go bankrupt does.”
During the 1997 Asian crisis the US was seen as helpful in bailing out the bankers, bosses and friendly governments that were under pressure.
That’s not guaranteed now.
The plunging Turkish currency underlines the fragility of the recovery from the economic crisis globally.