The tragedy of Turkey’s deepening currency crisis is that it was largely self-inflicted. Though fiscal vulnerabilities had mounted for some time, it was the concentration of decision-making in the hands of President Recep Tayyip Erdogan, a man of highly unorthodox economic views, that caused markets to turn aggressively against the lira. Yet, with the global fiscal and monetary backdrop changing, what is happening in Turkey may crystallise a notable shift in investor attitudes. Other emerging markets — and some developed countries — could now be tested.
While the European Central Bank is monitoring some EU lenders’ exposure to Turkey, this looks containable. Turkey’s trade links with other emerging markets, meanwhile, are mostly small as a percentage of their gross domestic product, limiting contagion through that route.
The most likely avenue through which Turkey’s woes could spread is in worsening investor sentiment towards other vulnerable markets. The background to this is the decade of loose monetary and fiscal policy since the global financial crisis, which led to a surge in emerging countries’ debt. The Institute of International Finance says the combined indebtedness of 30 large emerging markets rose from 163 per cent of GDP at the end of 2011 to 211 per cent in the first quarter of this year.