Turkey was thrust into a full-blown currency crisis on Friday as a defiant President Recep Tayyip Erdogan warned of an “economic war” against the country and President Donald Trump raised tariffs on the country's steel exports to the US.
In a tumultuous day on the financial markets, the lira tumbled by 14.3 per cent against the dollar to TL6.47 from the previous New York close. At one stage it fell as much as 18.5 per cent. The currency has lost more than 40 per cent of its value so far this year.
The lira’s implosion rippled across other emerging market currencies, pulling the likes of the South African rand, the Argentine peso and the Russian rouble lower by between 1.5 and 3.5 per cent.
Investors also retreated from riskier assets, while there were sharp falls in the shares of European banks exposed to Turkey.
After weeks of growing concern about the state of Turkey’s economy and political leadership, investors took flight as Mr Erdogan gave scant detail of how he intended to shore up the lira and Mr Trump deepened a damaging split with Ankara, a strategic Nato ally historically staunchly supported by the US.
Turkey is now facing the most serious financial crisis since Mr Erdogan took office 15 years ago. In similar past emergencies it has had Washington’s backing in regaining its financial stability but the two are now at loggerheads over issues including Turkey’s detention of an American pastor.
The EU has signalled its growing concern over the new crisis on its eastern flank. An IMF official said the EU Council had asked the fund for a meeting last month because officials were “very worried” about the economic pressures in Turkey and its potential impact on a deal with Ankara to stem migration to the EU.
Mr Erdogan, who has rejected any appeal to the IMF, vowed to fight an “economic war”, but a new plan to “rebalance” an overheating economy presented by finance minister Berat Albayrak failed to convince investors.
Mr Trump added to the pressure when he made a shock announcement on Twitter. “I have just authorised 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!” he tweeted. “Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!”
Mr Trump’s comments underlined the extent to which his administration has embraced the use of sanctions as a tool of foreign policy. In 2017 Turkey sold 1.5m tonnes of steel to the US, its largest export market, according to the US commerce department.
Its plunge on Friday hit Turkey’s bond and equity markets , sending the yield on the local currency 10-year bond up to 20.8 per cent and the benchmark BIST 100 index of leading Turkish stocks down 3.7 per cent, although it later mostly recovered.
Mr Erdogan urged Turks to stand firm and defend their currency. “If there is anyone who has dollars, euros or gold under the pillow, he should go and convert this at the bank,” Mr Erdogan said.
He also held talks by telephone with Russian president Vladimir Putin to discuss economic and commercial ties.
Using more orthodox rhetoric, Mr Albayrak, who is Mr Erdogan’s son-in-law as well as his finance minister, outlined three priorities: “a strong fight with inflation,” “fiscal discipline with a much tighter Finance Ministry”, and “reducing the current account deficit”.
But investors have pushed for more drastic measures. Charles Robertson, chief economist for emerging markets-focused Renaissance Capital, said: “The markets have lost confidence in the triumvirate of President Erdogan, his son-in-law as finance minister and the [central bank’s] ability to act as it needs to.”
Hami Aksoy, at the Turkish foreign ministry, said Ankara would respond in kind to what he called a violation of World Trade Organization rules.
“The United States should be aware that it will not achieve anything with such sanctions and pressure, but will only harm our alliance, which is already being rigorously tested. Turkey will respond to all measures taken against it reciprocally, as it has to date,” Mr Aksoy said.
The lira’s drop came amid increased concerns from the eurozone’s chief financial watchdog over the exposure of some of the currency area’s biggest lenders to Turkey — chiefly BBVA, UniCredit and BNP Paribas.
Despite a meeting at the US state department this week, Ankara has failed to persuade Washington to lift its sanctions against Turkey’s interior and justice ministers, over the country’s detention of Andrew Brunson, a pastor from North Carolina.
Mr Trump has raised the pressure over the issue because he wants to appeal to Evangelical voters ahead of November midterm elections.
Mike Pence, US vice-president, has been vocal on the need for Turkey to release Mr Brunson. The Trump administration had thought that it had secured a deal to release the pastor, but Turkey instead put him under house arrest, which angered Washington.
Heather Nauert, state department spokesperson, said on Thursday that the US had made it clear that Mr Brunson needed to be released. Asked if the two sides had made progress resolving the difficulties in the US-Turkey relationship, she responded: “I would say we would define progress as Pastor Brunson being brought home.”
Additional reporting by Adam Samson, Roger Blitz, Katie Martin, Chloe Cornish and Camilla Hodgson