With diplomatic tensions high, the Turkish lira has hit yet another all-time low against the US dollar, impacting more than just the Mediterranean country itself. But will the spillover into the eurozone bring a bang?
Turkey's embattled lira on Friday hit new record lows against the US dollar, losing some 5 percent in value. The lira went into free fall, sinking more than 12 percent at one point to reach an all-time low.
It has now lost more than a third of its value this year against the US dollar and the euro.
The plunge comes amid growing fears over the exposure of European banks. Tensions with the United States also show no sign of easing, as Washington piles more pressure on Ankara with sanctions after a meeting between a Turkish delegation and US officials in Washington yielded no apparent solution to a spat over the detention in Turkey of an evangelical American pastor.
More broadly, concerns over the sickly Turkish economy's wider impact were intensified Friday by a report in the Financial Times that the supervisory wing of the European Central Bank had begun to look more closely at eurozone lenders' exposure to the country.
Ask the president
Deepening investor concerns about Turkey's authoritarian trajectory under President Recep Tayyip Erdogan and the economic fallout have also weighed on the currency. Markets are concerned over the direction of economic policy in Turkey, where inflation has hit nearly 16 percent while the central bank remains reluctant to raise rates in response.
Speaking to supporters in the Black Sea province of Rize late on Thursday, Erdogan dismissed concerns over the currency as a campaign against his country. "There are various campaigns being carried out. Don't heed them," Erdogan said.
"Don't forget, if they have their dollars, we have our people, our God. We are working hard. Look at what we were 16 years ago and look at us now," he said. On Friday, Turkish Finance Minister Berat Albayrak — at the same time Erdogan's son-in-law — prepared to unveil the government's latest plan for country's economy.
Turkish economist Korkut Boratav sees the need for urgent action: "The economy is fragile. Due to the foreign debts of companies and banks and the current account deficit, there is a great need for foreign capital."
What about the eurozone?
A new analysis by Berenberg Bank sees little long-term impact of high Turkish inflation and low interest rates on eurozone gross domestic product (GDP) growth. "Even if eurozone goods exports to Turkey were to fall by, say, 20 percent, this would subtract no more than 0.1 percentage point from growth in the big eurozone," according to the report.
Even Turkey's annual GDP, which is around €750 billion ($860 billion), is only equivalent to 6.5 percent of the eurozone's GDP. Though this is four times larger than Greece's, it is still "less than half the size of the Italian economy, despite Turkey's larger population of around 80 million versus around 60 million for Italy," according to the analysis.
Turkey faces serious economic slowdown
Furthermore, the bank sees hope in other recent crises, like the attempted coup in 2016. Even though the Turkish economy shrank in its aftermath , eurozone confidence remained unchanged and credit growth even rose during the period.
And even if eurozone exports to Turkey fell through the floor, previous experience has shown that European companies are "pretty quick in identifying and switching to new markets. Selling more elsewhere would offset some of the hypothetical decline in eurozone exports to Turkey." Once any crisis was over, the bank expects exports to recover quickly.
Too little, too late?
Obviously, a real Turkish crisis would have knock-on effects, though Berenberg sees Europe's exposure to Turkish banks as being too small to cause much harm. Even in the worst-case scenario, "bank supervisors in the eurozone would have sufficient tools at their disposal to contain the damage," making a credit crunch in any part of the eurozone highly unlikely, concludes the upbeat analysis.
Korkut Boratav is more concerned and thinks an intervention by the IMF is the only way to save the European banks. "The Europeans should have known that they should not lend to distressed banks," criticizes Boratav. "This is one of the most important principles of the free market economy — if you lend money, you take a risk and must accept the losses."