The Turkish economy is in turmoil as fears over an ongoing currency and debt crisis grow. While the problem is being billed in some quarters as a primarily domestic one, concerns of wider contagion abound.
All year long, Turkish economic delight has been in short supply. Fears of a possible currency collapse moved from a steady flow to just shy of a dam burst in recent days as the Turkish lira plunged in value against the US dollar.
Although Turkish President Recep Tayyip Erdogan has been defiant about his government's response to the brewing crisis, financial markets are far from reassured. With inflation soaring alongside borrowing costs in the country, the number of major loan defaults across the heavily indebted Turkish economy is rising fast.
With that comes the varied and familiar lexicon of financial crises, well-known to those with clear memories of the global financial crisis of a decade ago — contagion, "too big to fail", "systemically important", and so on.
The idea that it only takes a domino or two to bring the whole house down was in full evidence when the US subprime mortgage crisis precipitated the co-called "Great Recession” of the late 2000s and early 2010s. It has accentuated the ongoing fears over the Italian economy, sharply focusing minds in the corridors of power in Brussels.
The question now with Turkey is whether or not the ongoing problems there will be contained as a damaging domestic crisis only, or something with far wider implications.
Too dependent on foreign money
For several years now, Turkey has been dependent on foreign money to keep its economy moving. It has one of the largest current account deficits in the world and as the country's banks and big companies have battled against that gap, they have borrowed heavily in foreign currency.
As long as the tap keeps flowing, things can continue to gleam on the outside at least. However, for several reasons — not least the increasing authoritarianism of President Erdogan — foreign investment has dramatically slowed into the country and the lira is being sold off rapidly. Debts left, right and center are suddenly under severe pressure, and with the country's debt rating looking ever more dismal, the specter of widespread defaulting looms.
For the best part of a year now, the Turkish economy has been dealing with the developing consequences of the situation, with several lenders having been asked to restructure debt due to the fall in value of the lira. A longer-term economic crisis in the country seems inevitable.
Too big to fail?
So can a crisis in an economy as large as Turkey's be limited to that country alone? By nominal GDP, the Turkish economy is the 17th largest in the world. In terms of European nations, only Germany, the UK, France, Italy and Spain rank ahead of it.
Then there is its interconnectedness to the EU and to the eurozone in particular. Among its largest trading partners are Germany, France, Italy, Spain and France, and the EU is comfortably Turkey's biggest trading partner.
It has a population of 80 million and is a country of pivotal geopolitical significance, given the fact of the cultural, political and geographical boundaries it straddles. Arguably most importantly of all, Turkey has done a deal with the EU over the travel and relocation of refugees — a fragile and politically sensitive agreement that has looked far from watertight in recent times.
An exposed eurozone
Several economists have pointed to the fact that financial crises in similarly emerging economies such as Thailand, Indonesia, Mexico, Argentina, Brazil and South Korea came in the years shortly before the global financial crisis and that such crises — which often trigger major debt defaults — can easily leak into the large lenders of developed economies, resulting in further chaos.
Last week, the Financial Times reported that the European Central Bank was concerned by the level of exposure European banks such as Spain's BBVA, Italy's UniCredit, and France's BNP Paribas had in US dollars in relation to Turkish borrowers
According to the Bank for International Settlements, Spanish banks are owed $83.3bn (€73bn) by Turkish borrowers and French banks are owed $38.4bn. Italian lenders are owed $17bn in a mix of local and overseas currencies. With the lira still falling towards an uncertain fate, the possibility of Turkish borrowers turning their back on these loans is regarded as a distinct possibility by several ratings agencies.
Given the potential vulnerabilities in those countries, it is hardly an appealing prospect.
Fears over a Turkish collapse have already affected the value of currencies of other emerging economies, with the South African rand and Brazialian real among those to have lost value after a wave of selling in recent days.
"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.
No pardoning Turkey in the White House
While Turkey may yet seek the routes widely being prescribed for it by several economists — either raising interest rates or turning to the IMF for assistance, or both — there are few guarantees of any kind of stable future, either short-term or longer-term, given Erdogan's consistent opposition to both notions, and the fact that the roots of the crisis are already somewhat out of control.
The growing tensions between US President Donald Trump and Turkey, exacerbated on Friday when Trump announced higher US sanctions on Turkish steel and aluminum, further complicate matters.
While Turkey may not quite be like Italy in terms of critical importance to the EU economy, it appears less than prudent to downplay the impact a possible financial catastrophe in the Mediterranean country could have on the eurozone and beyond.