The Turkish lira has lost more than 40 percent of its value against the dollar since the beginning of the year, the country's debt has been downgraded by Moody’s and Standard & Poor’s, and experts are predicting a recession in 2019. President Recep Tayyip Erdogan has blamed the crisis on western countries, and the United States in particular, since the crisis began after President Trump doubled tariffs on Turkish metal exports to put pressure on the government to release a jailed American clergyman. But, like many other crises in emerging markets, even if the match that ignited this economic conflagration was the tariff increase, the combustible conditions were homemade and the result of an unsustainable credit boom and overborrowing, as Prof. Kalemli-Ozcan explains.
The Turkish crisis is a homemade textbook example of an emerging market crisis. It could have been easily predicted as Prof. Kalemli-Ozcan wrote in 2014, as cited by the New York Times. At this point,the crisis could spread to other potentially vulnerable emerging markets, those that are borrowing heavily from abroad, especially if the borrowing is in foreign currency and inflation is high (which is an indicator that the domestic currency will likely weaken). There is the possibility that the Turkish economic crisis has an impact on Europe as well, since many European banks have lent to Turkish banks and companies. The pivotal role that Turkey has played in the refugee crisis introduces another set of concerns, since Europe cannot afford to have an unstable Turkey in its backyard. The United States, while more insulated from the economic fallout of a Turkish crisis, will face political pressures if the crisis brings Turkey closer to Russia and introduces a new source of economic and political tension in a volatile region.