Finance crisis in Turkey grows

Turkey’s plight deepened Monday as the lira fell to new lows and President Recep Tayyip Erdogan’s refusal to abandon his unorthodox economic policies left investors fearing a new global financial crisis.

Turkey and other countries that borrowed freely when dollars were plentiful and cheap now face soaring debt payments they may no longer be able to make.

Such worries mounted as the plunging lira dragged down currencies in developing countries such as South Africa, Argentina, Mexico and Indonesia.

On Wall Street, trading screens glowed red as stock market losses that started in Asia spread across North America and Europe.

Turkey’s ills have been inflamed by President Donald Trump’s abrupt move on Friday to double tariffs on imported Turkish metals in a bid to punish Erdogan for refusing to free an American pastor facing terrorism-related charges.

As the two NATO allies squared off, national security adviser John Bolton met at the White House on Monday with Turkish Ambassador Serdar Kilic at the latter’s request.

“They discussed Turkey’s continued detention of Pastor Andrew Brunson and the state of the U.S.-Turkey relationship,” Sarah Huckabee Sanders, the White House press secretary, said in a statement.

Turkey is in financial trouble because its banks splurged on dollar borrowing in recent years while the Federal Reserve kept interest rates near zero. The government in Ankara also busted its budget to spur economic growth, especially in the wake of an abortive 2016 coup.

With each lira now buying fewer dollars, Turkish borrowers’ debt payments are quickly becoming unmanageable. So far, Erdogan is resisting investor calls to raise interest rates to support the currency, or to seek a bailout from the International Monetary Fund.

If Turkish borrowers default on their debts, foreign banks - especially in Europe - would suffer big losses. Large Spanish banks are owed more than $82 billion, while French banks have $38 billion in loans outstanding, according to the Bank for International Settlements in Geneva.

Turkey’s predicament is largely the result of its own errors. But the nation of 80 million is unlikely to be the only casualty of the shifting financial climate, which stems from changes in policy at the Federal Reserve and other central banks.

The U.S. dollar, now at its highest level in 13 months, is being driven higher by the Fed’s interest rate increases and its sell-off of government securities.

“Markets are waking up to the reality that there will be consequences to the rise in interest rates,” said economist Jacob Funk Kirkegaard of the Peterson Institute for International Economics. “It’s part of the transition away from the zero-rate environment we’ve had where money has been really, really cheap.”

Global debt loads have exploded since the Great Recession. From $97 trillion in 2007, total household, corporate and government debt grew to $169 trillion last year, according to the McKinsey Global Institute.

Much of the most aggressive borrowing has been done by corporations, notably in developing markets such as China, McKinsey said in a report released in June that warned of potential vulnerabilities.

“Global corporate default rates are already above their long-term average, and the prospect of rising interest rates may put more corporate bond borrowers at higher risk,” McKinsey said.

For now, the worries are confined to emerging markets that suffer from the same debt problems as Turkey and their European bankers. The Turkish crisis “is not a serious threat to the U.S. economy, or the banking system, or the Fed’s plans to continue with the gradual normalization of policy,” Ian Shepherdson, chief economist for Pantheon Macroeconomics, wrote in a client note.

“Turkey’s woes cannot inflict damage on the U.S. manufacturing sector on the scale triggered by the Asian meltdown in 1997-to-1998.”

Indeed, the Dow Jones industrial average dropped only 125 points, or 0.5 percent.

Turkey’s central bank announced new measures Monday aimed at halting the rapid depreciation of the country’s currency.

After the lira plummeted to a record low overnight, the central bank said that it would “take all necessary measures to maintain financial stability” and provide banks with the liquidity they required.