Rapid inflation, a tanking currency and political influence on fiscal policy has plunged Turkey’s economy into crisis.
While European leaders and analysts have called on Turkey to boost interest rates and cool down its overheating economy, President Recep Tayyip Erdoğan has defiantly panned western powers for waging “economic war” on his country.
{mosads} Easy loans from European banks had helped Turkey fuel a massive, debt-funded expansion that boosted the country’s economy but also spurred rampant inflation. Those banks now face billions of euros in losses as the falling value of the lira makes Turkish debt much harder to pay off.
The U.S. has a limited direct financial stake in Turkey, but a prolonged financial crisis there could spread chaos through financial markets and pose new national security challenges for the Trump administration.
The crisis in Turkey comes as the country has been mired in a dispute with the United States over the detention of Pastor Andrew Brunson, which has raised the ire of President Trump.
Here are five ways an economically battered and isolated Turkey could pose consequences for U.S. interests.
Turmoil in emerging markets and tough losses for EU banks
U.S. banks have a limited presence in Turkey with just $38 billion in total claims on the country, according to an analysis from Pantheon Macroeconomics. Turkey also accounts for just 1.4 percent of global GDP, which makes U.S. banks relatively safe from direct harm.
“Even if all these claims were to be written off — they won’t be — the impact on the U.S. banking system would be minimal,” wrote Pantheon chief economist Ian Shepherdson in a research note Tuesday.
“It’s bad for some European banks, whose Turkish customers are now going to struggle mightily to service their debts. But it is not a serious threat to the U.S. economy,” Shepherdson wrote.
But Turkey’s financial crisis has already spawned turmoil in other emerging markets like China, where the U.S. and its allies face much larger stakes. Investment funds tracking developing economies have fallen sharply since Friday and the crisis has also roiled Chinese equity and currency markets, meaning the U.S. economy and financial markets may still be impacted.
More trade tensions between the US and Turkey
Turkey’s economic crisis comes as President Trump has intensified a trade dispute with the country by doubling steel and aluminum tariffs on exports from Turkey. Turkey had already been impacted indirectly after the U.S. imposed tariffs on the European Union, with whom Turkey shares a customs union.
Turkey, which has previously imposed tariffs on U.S. agricultural exports, responded to the U.S. actions last week by slapping another round of steep tariffs on U.S. goods Wednesday. Turkey’s latest tariffs include a 50 percent tax on U.S. rice, 140 percent on spirits, 60 percent on tobacco and 120 percent on cars.
“Recent developments in the U.S.-Turkey relationship threaten both countries’ economic interests and put at risk an alliance that has proven its value over decades,” said Myron Brilliant, U.S. Chamber of Commerce executive vice president and head of international affairs.
Crisis hinders US, EU response to Russia
The Turkish financial crisis is the latest threat to the country’s ties with the U.S. and the European Union, pushing apart key allies in challenging Russian aggression.
EU leaders have called on Erdoğan to accept interest rate hikes and other measures to stabilize Turkey’s economy and ween it from its reliance on foreign debt. Erdoğan has refused to do so and blamed the crisis on western “economic terrorists,” including the U.S.
Trump has also imposed financial sanctions on two top Erdoğan officials over the detainment of Brunson. He also signed Tuesday a massive defense spending bill that bans the sale of F-35 fighter jets to Turkey, which Ankara has helped develop.
Erdoğan has responded by rallying Turks against the U.S. and seeking closer economic ties with Russian President Vladimir Putin. The deepening divide among NATO members could weaken attempts to respond to various Russian actions such as Kremlin-backed cyber attacks, electoral interference in various countries and its occupation of Ukraine.
Further unrest in the Middle East, complicating life for Trump
Turkey has been a key member of the international coalition fighting the Islamic State in Iraq and Syria (ISIS), and its woes have the potential to disrupt the fight at a pivotal moment.
Turkey already stalled momentum in the fight against ISIS when the country earlier this year launched an offensive against Kurdish forces in northern Syria. That forced U.S.-backed Kurds fighting ISIS to leave the fighting and help their brethren, pausing the battles against the terrorist group in the Middle Euphrates River Valley.
Ankara considers the Kurdish fighters as terrorists connected to outlawed Turkish Kurdish separatists, while Washington sees them as the most effective native fighting force on the ground in the Syria.
Turkey and the United States appeared to reach a breakthrough in their impasse over the Kurds when they reached an agreement in June on a “Manbij Roadmap” that sets the withdrawal of the Kurds from that city.
The new tensions threaten to derail that progress just as the coalition plans a final push to rout ISIS, but officials have downplayed any connection.
“We’ve seen no change in our relationship with our Turkish allies,” U.K. army Maj. Gen. Felix Gedney, the coalition’s deputy commander for strategy and support, told reporters at a Pentagon briefing Tuesday.
So what happens to Güllen?
One of the root causes of U.S.-Turkish tensions has been a Muslim cleric living in Pennsylvania.
Erdoğan blames Fethullah Gülen for the 2016 failed coup attempt against him and has demanded the U.S. immediately extradite the cleric. But the U.S. has been unwilling to do so, citing Gülen’s due process rights.
Gülen is a legal U.S. resident who has lived in rural Pennsylvania since 1999 after fleeing Turkey. He and Erdoğan were allies before Erdoğan turned on him, and Gülen denies any responsibility in the coup.
Turkish officials have linked the release of Brunson, arrested in 2016 under suspicions of aiding the coup, with Gülen’s extradition.
“They say ‘give us the pastor.’ You have a preacher [Gülen] there. Give him to us, and we will try [Brunson] and give him back,” Erdoğan said in September.