Turkey’s escalating diplomatic disputes with Germany and the United States have spilled into the country’s financial markets, prompting declines in Turkey’s currency and the Istanbul stock market.
The German government reacted with outrage to reports that the Turkish government has decided to charge Peter Steudtner, a German who heads Amnesty International in Turkey, with membership of an armed terrorist organization. “We find the demand that he be sentenced to 15 years’ imprisonment completely incomprehensible and unacceptable,” said German Foreign Minister Sigmar Gabriel.
While Germany and Turkey have been engaged in a lengthy diplomatic row over Mr. Steudtner’s arrest, the United States was propelled into a similar controversy last week with the arrest of a Turkish employee at the US Consulate in Ankara for alleged ties to a failed coup attempt in 2016.
“This could put even more strain on the lira.”
In response to the arrest, the Trump administration announced that it has stopped issuing visas in Turkey while it conducts a review of the situation. Turkey responded by cutting off visas to US citizens in Washington.
Amid fears that business and holiday travel could take a huge hit, shares in Turkish Airlines plunged 11 percent in a single day on Monday. According to official figures, 313,654 Turks visited the US last year, while 459,453 Americans visited Turkey.
Following the tit-for-tat visa boycott, the Turkish lira dropped 5 percent against the US dollar and the euro, while the Borsa 100 share index was down 4.7 percent before recovering.
“This could put even more strain on the lira,” said Timothy Ash, an emerging markets sovereign debt analyst at BlueBay Asset Management in London, referring to the currency’s 15 percent fall against the euro this year. He said that the government may be forced to intervene soon to prop up the lira.
Worried that the economy may come off the rails, especially if the US Federal Reserve continues to raise interest rates, Deputy Prime Minister Mehmet Simsek told Handelsblatt on Monday that his government “will take anti-cyclic measures to increase our leeway.” He didn’t specify what measures were being contemplated but such efforts usually mean interest rate changes to keep foreign investment flowing.
Turkey and other emerging market countries have benefited from record low interest rates in developed countries, which prompted investors to seek the higher returns offered by emerging market debt. Now that interest rates are rising in the US, the fear is that “hot money” will be pulled from emerging markets, touching off a crisis similar to what happened in Southeast Asia in 1997, when several countries saw the value of their currencies plummet against the dollar and were unable to repay dollar-denominated loans.
One company already getting hammered by the fall of the lira is Turk Telecom, the fixed-line telephone company one-third owned by the government. The company took out a €4 billion ($4.75 billion) loan in 2013, but has missed three repayments, the latest in September, and has asked for an extension from its creditors.
Other companies also have borrowed heavily in the US debt markets, with Turkish companies now owing around €182 billion. In addition, the Turkish government must repay €144 billion in foreign currency debt in the next 12 months.
Mina Toksoz, a Turkey specialist at the Royal Institute of International Affairs in London, said most of the foreign currency debt is held by exporters who have revenues in foreign currency, so the impact of the dramatic lira decline may be temporarily muted.
She said the economy has proved remarkably resilient in the past year, primarily because Turkey has a very large domestic market. After last year’s coup, a fiscal stimulus and credit boom helped the country snap out of the economic doldrums.
But Mr. Toksoz said if Turkey’s money problems starting to worsen all at once, the country could have difficulty dealing with the crisis.
“The problem the government doesn’t seem to be taking into account, is there could be multiple deteriorations that come at the same time,” Mr. Toksoz said, mentioning things like a deterioration in sentiment about Turkey in the US bond market or a simultaneous rise in interest rates and oil prices.
Germany intends to bring up Turkey’s proposed membership in the European Union at the EU heads of government meeting later this month with a view toward rejecting Ankara’s entrance into the club once and for all because of the country’s human rights record. The Turkish government has said it is no longer interested in joining the EU.
One reason the Turkish government appears to be ratcheting up tensions with Germany and the US is a gamble that both countries will send Turkish political dissidents back to Turkey to stand trial for their alleged participation in the failed coup attempt.
In particular, diplomats in Washington said Ankara may be hoping to trade the jailed US Embassy employee for Fethullah Gülen, a former imam who runs a Turkish social organization called Hizmet that the Ankara government accuses of being behind the coup. They have demanded Mr. Gülen’s extradition from his exile home in Pennsylvania.
Turkey has also accused the German government of refusing to send back about 400 Turkish dissidents whom it says were involved in the coup. Diplomats believe the arrests of US and German nationals may be aimed at attempting a prisoner swap.
Ozan Demircan has been part of Handelsblatt’s investigative team, covering primarily financial firms, since July 2014. Charles Wallace is an editor for Handelsblatt Global in New York. To contact the authors: email@example.com and firstname.lastname@example.org