Turkey's financial crisis has been expected for quite some time. Fears over the country's reliance on foreign currency to keep its economy moving grew throughout 2018, and the Turkish lira's collapse in value last week, while spectacular, was not entirely surprising.
With one of the largest current account deficits in the world, Turkey's banks and big companies have battled against that gap by borrowing heavily in foreign currency to maintain activity in the economy.
However, as fears over Turkish economic policies under authoritarian President Tayyip Erdogan have increased, that debt has come under severe pressure. Foreign investment has dramatically slowed in the country and the lira is being sold off rapidly.
The Turkish situation has raised questions about the state of other emerging economies with high levels of foreign currency debt. Although the lira recovered somewhat on Tuesday, the currencies of other emerging economies have taken a nosedive since the Turkish currency chaos erupted.
On Tuesday, the Indian rupee fell to a record low of 70 against the US dollar, while the Argentine peso, South African rand and Brazilian real also lost value earlier this week after a wave of selling.
Indonesia's central bank hiked interest rates on Wednesday in an attempt to halt a sell-off in its rupiah while the Chinese yuan has also suffered, falling to a 15-month low against the dollar.
"It's the usual classic emerging markets story where people wake up, see bad news in one country and start selling everywhere," Bart Turtelboom, chief executive at international emerging markets company APQ Global, told the news agency Reuters.
The jitters in other emerging markets reflect concerns over the high level of foreign currency debt they hold. According to the Institute of International Finance, a financial institution trade group, governments, financial firms and a raft of companies in emerging economies have $2.7 trillion (€2.38 trillion) in U.S. dollar-denominated debt that is due between now and 2025.
Just like in Turkey, these loans and bonds need to be paid off and refinanced on time. However, when the domestic currencies in those markets fall in value against the US dollar, that debt becomes increasingly difficult to service, because revenue generated in local currencies is no longer as valuable as before.
While fears that other emerging economies could come under similar pressure to Turkey are easily understood, it is important to highlight the fact that Turkey is a special case.
Read more: Turkish economic shadow looms over Europe and beyond
Turkey's foreign currency debt as a share of its gross domestic product (GDP) is higher than several other emerging economies and the steep decline of the lira against the dollar reflects that.
However, what makes the Turkish situation especially critical is the political situation in the country, where an authoritarian leader's meddling in monetary decisions normally left to experts has spooked investors about the country's capacity to cope.
However, the specter of foreign currency debt in various emerging economies continues to loom, regardless of how the Turkish paroxysms play out. Cheap borrowing costs in recent years have led to high levels of such debt the economies of Argentina and South Africa, while Poland, Hungary and Chile have foreign-currency-denominated debt equal to half their GDP, according to Deutsche Bank.
Even as the lira recovers a little this week, traders on global stock markets remained concerned about the possibility of contagion seeping in.
"While the lira is stabilizing, investors are still concerned that the crisis will spread to other emerging economies and currencies," Hikaru Sato, senior technical analyst at Daiwa Securities, told AFP. "Trading is expected to remain nervous for now."
Another headache for the global economy
As the Turkish crisis rumbles on, the extent of the damage remains to be seen.
Several economists have pointed to the fact that financial crises in emerging economies such as Thailand, Indonesia, Mexico, Argentina, Brazil and South Korea came in the years shortly before the global financial crisis of 2007-08 and that such crises — which often trigger major debt defaults — can easily leak into the large lenders of developed economies, resulting in serious global chaos.
In an era when both political and economic stability is in increasingly short supply, it is another headache the global economy could do without.