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 Donald Trump imposed even higher tariffs on its steel and aluminium exports to the US.
In a tumultuous day in the markets, the lira tumbled 14.3 per cent against the dollar to TL6.47 from the previous New York close. The currency — which has lost more than 40 per cent of its value this year — was 18.5 per cent lower at one point on Friday.
The lira’s collapse rippled across other emerging markets, sending the South African rand, Argentine peso and Russian rouble lower by between 1.5 per cent and 3.5 per cent. Investors retreated from riskier assets, while European banks with exposure to Turkey suffered sharp share price falls.
After weeks of mounting concern about Turkey’s economic and political leadership, investors took flight as Mr Erdogan gave scant detail about how he would shore up the currency, and as Mr Trump exacerbated a damaging split between the two longstanding Nato allies.
Turkey faces its most serious financial crisis since Mr Erdogan took office 15 years ago. In the past, Washington has helped Ankara regain financial stability but the two nations are at loggerheads over issues including Turkey’s detention of an American pastor.
Wilbur Ross, US commerce secretary, on Friday evening said the US would double the tariff on imports of Turkish steel to 50 per cent, because the previous level of 25 per cent had not been enough to sufficiently reduce Turkish exports to the US.
“Doubling the tariff on imports of steel from Turkey will further reduce these imports that the [commerce] department found threaten to impair national security,” said Mr Ross.
The EU has signalled its growing concern over the crisis. An International Monetary Fund official said the EU council had asked the fund for a meeting last month because officials were worried about the pressures in Turkey and the potential impact on a deal with Ankara to stem migration to the EU.
Mr Erdogan, who has rejected the idea of making any appeal to the IMF, vowed to fight an “economic war”. But a plan to “rebalance” an overheating economy presented by finance minister Berat Albayrak failed to convince investors.
Mr Trump raised the pressure with an announcement on Twitter that he would increase tariffs, adding: “Our relations with Turkey are not good at this time!”
“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!” the US president tweeted.
Later on Friday, Kevin Hassett, the chairman of the White House Council of Economic Advisers, said the Trump administration was “paying close attention” to Turkey.
“We have been looking at the financial market repercussions from the big decline in their currency and thought about potential systemic risks associated with it,” Mr Hassett told the Financial Times.
Mr Hassett added that while investors were focused on just a few countries at present, “contagion historically has been a problem” for other EM states. “Markets would be a lot calmer if Turkey were to come forward with a clear plan about what to do,” he said.
Mr Trump’s comments underlined the extent to which the White House has embraced the use of sanctions as a foreign policy tool. 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, pushing 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 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,” he said.
He also spoke to Russian President Vladimir Putin to discuss economic and commercial ties.
Using more orthodox rhetoric, Mr Albayrak, the finance minister and prime minister’s son-in-law, outlined three priorities to tackle the crisis: fighting inflation, “fiscal discipline with a much tighter finance ministry”, and cutting the current account deficit.
But investors want more drastic measures. Charles Robertson, chief economist for EM-focused Renaissance Capital, said markets had “lost confidence in the triumvirate of President Erdogan, his son-in-law as finance minister and the [central bank’s] ability to act”.
Hami Aksoy, a Turkish foreign ministry official, 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,” Mr Aksoy said.
The lira’s fall came amid increased concerns from the eurozone’s chief financial watchdog over the exposure of some of the single currency area’s biggest lenders to Turkey — chiefly BBVA, UniCredit and BNP Paribas.
In Washington this week, Turkey failed to convince the Trump administration to lift sanctions against its interior and justice ministers — a move the US imposed in response to the detention of Andrew Brunson, a pastor from North Carolina.
Experts said it was highly unusual for a US president to use sanctions to pressure a country to release one of its citizens from detention. But some analysts point out that the fact that Turkey, a Nato ally, was detaining American citizens was an exceptional case.
Mr Trump and Mike Pence, his vice-president, have been vocal about 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.
The White House is pushing hard for his release before the Congressional midterm elections partly because of the importance of the Evangelical Christian vote.
Later on Friday, Mr Trump said that trade talks with Mexico — as part of a broader attempt to rewrite the North American Free Trade Agreement — were “coming along nicely”. But he said US carworkers and farmers needed to be taken care of otherwise there would be no deal.
“New President of Mexico has been an absolute gentleman,” Mr Trump tweeted. “Canada must wait. Their Tariffs and Trade Barriers are far too high. Will tax cars if we can’t make a deal.”
Additional reporting by Adam Samson, Roger Blitz, Katie Martin, Chloe Cornish and Camilla Hodgson