Turkey’s currency crisis is by no means a black swan event as trouble had been brewing in the country for several months. Still, fears of a spillover effect from the troubles in the world’s 17th largest economy played havoc with the global financial markets Friday as panicked investors ran for cover.
Turkey is an emerging-market economy with a population of roughly 80 million. It is a founding member of the Organization for Economic Cooperation and Development and is among the early signatories of the General Agreement on Tariffs and Trade, an international pact that promotes reducing trade barriers. It is also a part of NATO, making it a key military ally of the U.S. Historically, the country has parlayed its geographic location to serve as an important bridge between the East and the West.
Yet, the image the world holds of Turkey in recent years has been colored by headlines about President Recep Tayyip Erdogan’s authoritarian rule and mounting criticism over his government’s inept handling of the economy. Making matters worse, Ankara is in the midst of a diplomatic row with Washington over its detention of pastor Andrew Brunson on espionage charges. In addition to sanctioning two Turkish officials last week, President Donald Trump on Friday announced via Twitter that he has authorized doubling tariffs on steel and aluminum imports from Turkey. Iron and steel exports to the U.S. totaled $885 million in 2016, according to the Office of the U.S. Trade Representative.
In the most visible sign of deteriorating confidence in the country, the Turkish lira USDTRY, +15.9654% sank to its lowest level against the U.S. dollar with the buck buying 6.42 lira versus 5.55 earlier.
The plunge in the currency could easily push Turkey to the brink given its elevated debt burden and perhaps force the government to seek a bailout. Turkey’s external debt reached $466.67 billion, or 53% of its gross domestic product, at the end of March with about one-fourth in short term debt which will come due within the year, reported Anadolu Agency, a government-run news agency. In comparison, Deutsche Bank estimates Turkey’s foreign currency-denominated debt at closer to 70% of GDP.
Read: Cost to insure Turkish debt spikes as Turkey teeters on brink of currency crisis
The U.S. dollar, as represented by the ICE dollar index DXY, +0.68% jumped 0.9%, in part due to a belief that Turkey’s problems are not expected to have a major impact on the U.S.
Read: Dollar index jumps to 14-month high as Turkey’s lira gets rocked to historic low
See: 3 reasons the selloff in Turkey’s lira matters for markets all over the world
Meanwhile, U.S. stocks fell sharply as Turkey underscored global risks at a time when major central banks, led by the Federal Reserve, are shifting to tighter monetary policy regimes. The S&P 500 SPX, -0.71% shed 0.7% to close at 2,833.28 and the Dow Jones Industrial Average DJIA, -0.77% fell 0.8% to 25,313.14.
Read: Stocks fall as Turkey’s currency crisis spotlights global risks
See: Here’s what it will take to push Wall Street’s buttons
There are also contagion fears, particularly for Europe given its nearly $180 billion in trade with Turkey as well as sizeable loans to the country.
All European stock markets closed lower with the Euro Stoxx 50 SX5E, -1.94% falling 2%.
Read: European stocks end sharply lower as Turkey contagion fears spook investors
See: FTSE 100 ends lower as Turkey contagion angst grows, but retains slight weekly gain
Gold GCZ8, -0.06% which tends to gain when investors are unwilling to take on risk, did not benefit much from the developments in Turkey with the precious metal settling almost unchanged on Friday at $1,219 an ounce.
Read: Gold closes slightly lower as dollar’s jump outweighs Turkey contagion fear
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