The Turkish lira is in free fall. It was already down more than 35 per cent on the year when it plummeted to record lows on Friday, surpassing the Argentine peso as the world’s worst performing currency in 2018.
The further the lira falls the greater the possibility of a balance of payments crisis, corporate defaults on foreign debt and likely meltdown for the banking sector. It was within President Recep Tayyip Erdogan’s gift to put the brakes on.
So far his defiantly unorthodox reaction, blaming the crisis on economic war, calling on citizens to trade gold and dollars for lira, and even referencing God, have spooked the markets more. This is not just Turkey’s problem.
The collapse of the Turkish economy would carry substantial risks of contagion in Asia and Europe, where equity prices of banks exposed to Turkish debt tumbled too on Friday. The lira’s meltdown is already hitting emerging market currencies across the board.
The geostrategic risks of this crisis, portrayed by Mr Erdogan as the work of western conspirators, are no less considerable. Turkey is shoring up political stability in Europe by harbouring millions of Syrian refugees. As a fellow Nato member it has until recently played a vital supporting role for US strategic interests in the Middle East. Europe’s relations with Ankara are under severe strain. With the US, they are now snapping. The overheating, over-leveraged economy has long been vulnerable. What has shaken markets is the recent confluence of events. On Thursday, Turkish officials returned from Washington having failed to forestall US moves to sanction the justice and interior ministers over the detention of Americans, including a North Carolina pastor resident in Turkey accused of involvement in 2016’s failed coup attempt. Exacerbating investor concerns have been the arbitrary decision-making in Ankara and personalisation of power by Mr Erdogan. The latter was exemplified by the appointment of the president’s son-in-law, Berat Albayrak, to replace a respected finance minister. To have any hope of halting the lira’s decline, Mr Albayrak needed to signal a tangible shift in policy during a scheduled speech on Friday. He should have shown, if not a willingness to go to the IMF then at least to adopt the kind of fiscal tightening programme the IMF might recommend. Furthermore, the central bank had to be able to demonstrate its independence, in the face of the president’s resistance, by raising interest rates substantially. Instead, the president and his finance minister are digging in. In a wanton break with past US policy of seeking to solve financial crises rather than deepen them, President Donald Trump has poured salt on these otherwise self-inflicted wounds. The US will raise tariffs on Turkish steel to 50 per cent and aluminium to 20 per cent, he tweeted as Ankara’s finance minister spoke. That intervention not only accelerated the lira’s decline — the greatest in a day in 20 years. It also reinforced Mr Erdogan’s claim to be the victim of external plots. The choices now on offer are stark. Either Turkey’s strongman backs down and seeks compromise. Or a worse rupture with the west, and a deepening economic crisis, are in sight. Mr Erdogan’s early popularity derived partly thanks to his government’s success in alleviating poverty. Having rid himself by constitutional referendum of a prime minister and accumulated untrammelled powers he will shoulder blame alone for any reverse. Unlike President Vladimir Putin in Russia, he has no petrodollars to fall back on. No one will gain from his attempts to tough it out.