A financial shockwave ripped through Turkey on Friday as its currency nosedived on concerns about its economic policies and a dispute with the U.S., which President Donald Trump stoked further with a promise to double tariffs on the NATO ally.
The lira tumbled 13 percent in one day, to 6.51 per dollar, a massive move for a currency that will make the Turkish poorer and further shake international investors’ confidence in the country.
The currency’s drop — 40 percent so far this year — has become a gauge of fear over a country facing the fallout of years of debt-fueled growth, international concern over President Recep Tayyip Erdogan’s push to amass power, and a souring in relations with allies like the U.S.
The diplomatic dispute with the U.S. was one of the triggers for the turmoil this week.
Turkey has arrested an American pastor and put him on trial for espionage and terror-related charges linked to a failed coup attempt in the country two years ago. The U.S. responded by slapping sanctions on Turkey and threatening more.
After inconclusive talks this week on solving the spat, Trump took advantage of Turkey’s turmoil on Friday to turn the screws on the country.
Trump tweeted that he had authorized the doubling of steel and aluminum tariffs “with respect to Turkey.”
Trump said tariff on aluminum imports would be increased to 20 percent and the tariff on steel imports will be raised to 50 percent as the Turkish Lira “slides rapidly downward against our very strong Dollar!”
He declared: “Our relations with Turkey are not good at this time!”
I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!
— Donald J. Trump (@realDonaldTrump) August 10, 2018
The United States is the biggest destination for Turkish steel exports with 11 percent of the Turkish export volume. The lira fell further after Trump’s tweet.
In what appears to be a diplomatic riposte, Turkey later said Erdogan had held a phone call with Russian President Vladimir Putin to discuss economic ties. It did not disclose details, but suggests Turkey might gravitate further away from its NATO allies toward cooperation with Russia, whose relations with the West are at their lowest since the Cold War.
Turkey’s woes have been aggravated by investor worries about the economic policies of Erdogan, who won a new term in office in June with sweeping new powers.
Erdogan has been putting pressure on the central bank to not raise interest rates in order to keep fueling economic growth. He claims higher rates lead to higher inflation — the opposite of what standard economic theory says.
Independent analysts argue the central bank should instead raise rates to tame inflation and support the currency.
In modern economies, central banks are meant to be independent of governments to make sure they set policies that are best for the economy, not politicians. But since adopting increased powers, Erdogan appears to have greater control over the bank as well.
Erdogan on Friday appealed for calm and renewed a call on people to change foreign money into local lira.
“Change the euros, the dollars and the gold that you are keeping beneath your pillows into lira at our banks. This is a domestic and national struggle.”
He appeared to blame foreigners for trying to hurt Turkey, saying: “This will be my people’s response against those waging an economic war against us.”
On Thursday, Erdogan said “If they have their dollar, we have the people, we have Allah.”
Treasury and Finance Minister Berat Albayrak — who is Erdogan’s son-in-law — tried to ease investor concerns during a conference, saying the government would safeguard the independence of the central bank.
“One of our principles will be ensuring the full independence of monetary policy,” Abayrak said as he outlined his ministry’s “new economic model.”
The currency drop is particularly painful for Turkey because the country finances a lot of its economic growth with foreign investment. As the currency drops, Turkish companies and households with debt in foreign currencies see their debts expand.
Coupled with an inflation rate of nearly 16 percent, that could cause a lot of damage to the local economy.
Foreign investors could be spooked and try to pull their money out, reinforcing the currency drop and potentially leading to financial instability.
Aylin Ertan, a 43-year-old caterer in Ankara, said she was concerned over the future of her small business.
“The price of the food that I buy increases day by day, the fuel that I put in my car to distribute lunches is more expensive, but I cannot raise my prices from one day to the next,” she said. “On some days, I end the day with a loss.”
Turkey’s woes shook world markets, pushing down stock indexes and lifting the dollar, which traders around the world typically buy in times of concern.
On Friday, the euro sagged to a 13-month low against the dollar, down 0.7 percent to $1.1450, on concerns that European banks operating in Turkey could suffer losses.
But analysts say that while there may be losses at some banks, Turkey’s economic problems do not pose a big threat to Europe or other big economies like the United States.