Could Turkey Trigger the Next Global Financial Crisis?

By E. Ahmet Tonak works at the Tricontinental: Institute for Social Research and Vijay Prashad, a writing fellow at the Independent Media Institute,  chief editor of LeftWord Books and the director of Tricontinental: Institute for Social Research. Prashad is also the author of Red Star Over the Third World (LeftWord, 2017) and The Death of the Nation and the Future of the Arab Revolution(University of California Press, 2016), among other books. Originally published by  Globetrotter, a project of the Independent Media Institute

All eyes are on the Turkish lira, the currency of Turkey. Its decline has been precipitous—it has already lost over 40 percent of its value against the U.S. dollar this year. For Turkey, which has relied upon the inflow of foreign credit, this poses terrible risks. Enormous debt coupled with a vicious attack for political reasons on the Turkish economy by the U.S. government has set Turkey toward the precipice. Will Turkey’s descent take Europe with it and then, certainly, other middle-income countries? Is this the harbinger of a new global financial crisis that would be far more dangerous than the one in 2007-08?

Financial Instability

The credit crisis of 2007-08 has not really ended. The problems posed by the collapse of the U.S. housing market and the subsequent debt problems in world banking have not been fixed. Sober recommendations from the Basel Committee on Banking Supervisionas well as from the International Organization of Securities Commissions and the International Association of Insurance Supervisors have been substantially set aside. Instead of genuine reform to the financial sector, the United States government held its interest rate near zero and flushed the financial system with U.S. dollars. The solution to a housing bubble in the United States has been to create a massive debt burden in the middle-income countries.

In countries such as Turkey, recently private companies started to take out more dollar-denominated loans from international financial institutions to finance their operations and even speculative investments. A flood of dollars crashed into these countries. Foreign speculators used this money to invest in their local currencies (including in lira-denominated public sector securities in Turkey). The Institute of International Financeshowed that this wave continued to crest as recently as the past few years. At the end of 2011, the thirty largest emerging markets were indebted to the tune of 163 percent of their gross domestic product; in the first quarter of this year, the percentage increased to 211 percent of GDP, an increase of $40 trillion in debt of these countries. The exit from the 2007-08 financial crisis was by debt-financed economic growth, with a massive balloon of various kinds of debt inflated over the past decade.

Total global debt is estimated to be $247 trillion. It is a figure that should give us pause. Much of this debt, furthermore, went to finance the expansion of the financial sector rather than develop the productive and socially beneficial sectors. It is a model of economic growth that demands more debt to finance itself. There are few other avenues for this unsustainable model. The trigger that might explode this bubble fully comes in the months ahead as countries such as Argentina, Brazil, South Africa and Turkey will confront the maturation of their $1 trillion of dollar-denominated debt. Will they be able to replace these existing loans with fresh loans? Who will be in line to lend money to countries that seem to be at the end of their rope?

Turkey’s Flu

Financial crises are not new to Turkey. Major crises struck this country of 80 million in April 1994 and February 2001. In both cases, the country lost a large part of its GDP and its foreign exchange reserves as interest rates skyrocketed (in 1994, overnight interest rates went from 75 percent to 700 percent, while in 2001 they went from 40 percent to 4,000 percent). Recovery came through a variety of means, namely through an IMF-induced “Transition to a Strong Economy” program. The IMF program pushed Turkey to “capital account liberalization,” a fancy way of saying that its banks were encouraged to borrow in dollars from international capital markets and lend in liras to domestic investors. The entire economy was restructured to rely on lower wages to encourage exports and by the inflow of short-term capital. As this volatile short-term capital rushed into Turkey, the current AKP government used it to fund extravagant, unproductive projects. There was no possibility that Turkey could export enough to finance its significant foreign debt. Massive current account deficits have been vulnerable to the withdrawal of the short-term foreign capital—what is rightly called “hot money.”

In 2011, everything seemed manageable. Turkey was on the threshold of entering the European Union, relations with the United States were on a high and the Anatolian businessmen saw their own manufacturing benefit in the markets from Lebanon and Syria to the Gulf and to North Africa. The war in Syria threw the entire political situation into turmoil. Exports to the Arab world declined, the refugee crisis put pressure on Turkey and its own political stability ended with the government opening up a new war on the Kurds. Turkey’s ambitions in Syria ended and the ruling AKP or Justice and Development Party’s government tried to bring stability by ruthlessly purging any dissenters in the country. Political favors brought incompetent people to take over from those who had been purged. All this brought internal stress into the Turkish economy.

And then came Trump. The tariff policy from the United States—particularly in this case on Turkish steel and aluminium—sent a tremor through the bankers who had lent Turkey money. Higher interest rates in the United States drew money out of places such as Turkey (and other middle-income countries) to rush back to the U.S., where the dollar is “good as gold.” All this hit the lira hard. It did not help that the United States and Turkey are in the midst of a political fight over a U.S. pastor who is jailed in Turkey and over a Turkish cleric who lives in the U.S. Since the attempted coup in Turkey in 2016, tension has existed between the two countries. Now, the U.S. administration has made it clear that even the release of the pastor will not be enough. “The tariffs that are in place on steel would not be removed with the release of pastor Brunson,” said Trump’s spokesperson Sarah Sanders. “The tariffs are specific to national security.” What that chilling phrase means is not clear.

It is an advantage to Trump that the banks with the largest exposure to the Turkish lira are all European—France’s BNP Paribas, Italy’s UniCredit and Spain’s BBVA. The European Central Bank has already indicated its concern despite the fact that these banks say that they are prepared for the worst scenario. The amounts are not small. Turkish borrowers owe Spanish banks in excess of $82 billion, while French banks are owed $38.4 billion and Italian banks are owed $17 billion. Turkey’s private sector debt is substantial—within a year it must pay $220 billion to service this debt. An inability to make these payments as well as a further collapse of the lira could set off a crisis in Europe, which would then have an impact on the global financial markets. Turkey, this time, could be what the U.S. housing market was in 2007.


Turkey’s finance minister Berat Albayrak, who happens to be the son-in-law of President Recep Tayyip Erdoğan, has said that his country has opened discussions with the IMF. He pledged not to put capital controls in place. Capital controls might well be the only optionto truly protect Turkey from economic collapse. The AKP party is averse to any radical solution. It will likely conform to IMF policieswithout going formally to the IMF—to preserve Erdoğan’s façade about being anti-Western. The AKP is now governed by anti-Western rhetoric, but pro-Western policies.

On August 15, the Turkish government approached the World Trade Organization (WTO) with a formal complaintabout the United States’ tariff policy. The complaint says that the U.S. tariffs are against the General Agreement on Trade and Tariffs (1994), the bedrock framework for the WTO, and that even U.S. law (Trade Expansion Act of 1962) violates the 1994 GATT agreement. Five days later, the WTO circulated this complaint among its members. There will now be a serious discussion based on this document.

Meanwhile, across its border, Iran has suffered as well from the return of U.S. sanctions. China has provided some short-term succor for Iran. Will it offer such protection to Turkey? When Boeing pulled out of its contract to sell aircraft to Iran, the Russian firm Sukhoi offered to do so. Will Russia now make similar concessions to Turkey? Will there be an Asian solution to the Turkish crisis? But can China and Russia, themselves vulnerable to the turbulence of global finance, bail these countries out indefinitely?

Other solutions are necessary, more radical ones.

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  1. The Rev Kev

    I don’t know if it is legally possible or not but what if Turkey announces that they are going to only pay any external debts in Turkish Lira and not US dollars or European Euros? They may still be screwed anyway but at least this way, it would encourage creditor nations and banks to do everything in their power to stabilize the Turkish economy so that they do not lose everything. Maybe Turkey can offer a few more base points in interest owed or priority for repayment to those that agree with taking the deal.

    1. jackiebass

      Probably a condition imposed on the loans is that they had to be repaid in dollars. I don’t know this as fact but suspect it is true.

    2. James Cole

      The loan documents require repayment in USD. Anything else requires negotiation and concession by creditors. Also, any attempt to give a preference to one set of creditors over another will probably run into the same problem Argentina had when it tried that, with the paying agent required to distribute payments received from the debtor pro rata across all creditors pari passu. A lot depends on the “fine print” though.

      1. Matthew G. Saroff

        As to the question of whether Turkey “might” precipitate the next financial crisis is kind of irrelevant.

        The financial system is at least as fragile as it was 10 years ago, so a gnat farting “might” cause the next financial crisis.

        1. John k

          The fragilities have been relocated. Us big banks better, smaller ones worse. EU banks and EM worse. Course, draghi can print any amount… and probably will to save EU banks, but not EM. So big reduction in EM spending and world gdp starting in EM, falling commodities, deflation. And trade wars too, oh my.
          Meanwhile wolf reports sub prime delinquencies rising to crisis levels, those can no longer use the card to maintain spending even as banks tighten on others. And fearless fed raises rates…

      2. Matthew G. Saroff

        Actually, if Turkey were to pass legislation changing domestic bankruptcy to include provisions for an “Exchange Rate Crisis”, it could shield many of the private entities who are in hock up to their eyeballs.

        There would much wailing and gnashing of teeth, but overall it would have a stabilizing effect, as lenders would not be so profligate.

          1. Matthew G. Saroff

            Add a bankruptcy provision that something like this:

            In the event that the exchange rate of the Turkish Lira and and the currency in which the loan is demonomated changes by more the XXX% over a period of YYY, a declaration of bankruptcy will change the denomination of the loan to Turkish Lira with a conversion rate equal to the daily close rate of the for the ZZZ percentile day over period YYY.

            Bankruptcy rewrites contracts all the time.

            As to the numbers, I would suggest:
            XXX= 20%
            YYY=12 months.

            This would mean that upon declaring bankruptcy, if the Lira want from 5 to the Euro to 100 to the Euro over 1 year, and the 80th percentile worst closing day was 70, the loan would be converted at a rate of 7 Lira:Euro.

    3. Lenniesbunnysmoothies

      If Turkey makes any effort to move away from the U.S. dollar then they’re almost certainly going to be invaded. To the United States Government any attempt to disrupt dollar supremacy is the ultimate Casus Belli. Libya goes for African Dinar, invaded; Iraq tries to sell oil off the dollar; invaded; In 2006 the US started funding terrorists in Syria, that just so happened to be the same year that it dropped the dollar; The US ramped up pressure on Pakistan after dropping the dollar (we probably would have invaded if it weren’t for them having nukes); the list goes on but it’s all the same sort of stuff. Erdogan being a dictator is enough to justify a war to the public. Trump gets positive media attention every time he drops bombs on brown people, and he’ll do anything for approval. Right now the only thing keeping the US out of Turkey is dollar dependence and military/strategic importance, but the US has a long history of depleting its military on behalf of dollar interests. If Turkey wants to move off the dollar they get invaded, if they pull the IMF stunt they collapse. They got one heckuva Scylla and Charybdis problem.

      1. Unna

        That’s why Turkey needs those Russian S400’s. And that’s why the US is having a nervous breakdown over that.

    4. NotReallyHere

      The contracts say USD, so they will have to be paid in USD or it would be a default. The key, it seems to me, is that the Turkish government is not carrying a lot of debt directly. – approx 28% of GDP IIRC and down from 43% in 2011 so default is not as scary to EM countries today as it was in 2001/2002 (Turkey’s last bank crisis)

      The problematic debts are likely those taken by Switzerland based offshore subs of Turkish local companies. In fact, Turkey’s capital accounts have often been amusing because “Errors and Omissions” were for many years the largest component of capital inflows i.e. it was parallel money channeled through subsidiaries and SPO’s and not officially declared.

      The loans are said to be funded,by both the local arms of EU banks and by state owned local banks. (isbank, Halkbank etc). In an implosion scenario, the banks would likely take the hit as the money borrowed would simply vaporize. The Turkish Government could likely decide which banks are worthy of “saving” (the locals) and which can go hang (the foreign). This is what the Russian’s did when Oil prices collapsed. Now that energy prices are rising again (Turkey’s CA deficit is all energy related), it is in a mirror situation to the Russian scenario.

      Interesting comment re the IMF. I remember in 2011 the Turkish government was worried about international confidence in Turkey (when the CA deficit was circa 10% of GDP) and played up that it was considering talks with the IMF to get a standby agreement. The talks never moved beyond preliminary stages because the Turkish government refused very basic IMF conditions. it seemed as if purported IMF talks were a PR exercise to shore up confidence at a delicate period in the recovery from the 2008 crash.

      Key point to remember, Turkey doesn’t give a Sh*t about the EU any more. It openly despises the whole institution. In the period to 2009, when Turkey was seriously (albeit intermittently) working to get EU membership, the EU could order this or that reform. That period ended quickly after the Iraq invasion and territorial implosion (invasion 2003, full fragmentation 2006/2007) and the Cyprus block to further negotiations (2009). No new negotiations have occurred since 2010 and Turkey is in no hurry to open them. Instead Turks appear to be happy to live with interlocking free trade agreements that give it generous access to both Middle Eastern markets and to the EU.

      So could this crisis cause a global meltdown? Probably, but Turkey is unlikely to enter talks with the IMF. Instead, it seems like it work even more closely with Russia to shore up energy supplies.

    5. Ginavon

      The title of this article should be WILL TURKEY TAKE THE BLAME FOR THE NEXT PLANNED FINANCIAL CRASH? Try to notice….financial crash takes wealth away from people and shifts assets to the bankers every time.

  2. Which is worse - bankers or terrorists

    Question here. If the debt is on corporate balance sheets, why not let them fail, let European and US money come in and buy the good assets or repossess the assets as collateral, and then nationalize those assets?

    If there are EU complaints they can always reneg on the refugee deal, as the money they get is peanuts to what they get from nationalizing the debt ridden companies.

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