Turkey’s Month of Reckoning

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My commuter train passes through several towns that have high concentrations of financial traders. It’s not hard to spot them; some sport the colorful smocks worn in the futures pits, while others intently scan charts on their tablets, looking for patterns. They’re in early, stoked by strong coffee; and they’re out early, unwinding on midafternoon departures with a cocktail.

During the month of August, you generally don’t see much of them at all. But I sensed that something was up last week when the 5:40 a.m. train into Chicago started filling up well ahead of Labor Day.

The reason for the early returns was Turkey, which stands at risk of a full-blown economic crisis. While the Turkish government has attributed its troubles to a coordinated attack by outsiders, its problems are very much homemade. Whatever the cause, the situation in Turkey has generated concern that extends beyond its borders.

Turkey has always been located on the cusp of the Western and Eastern worlds; its strategic position has only become more important in the last few years, given its border with Iraq, Syria, the European Union, and former Soviet Republics. Its economy, the world’s 17th largest, is deeply linked through trading and financial relationships to a number of others.

For these reasons, the steep decline of the Turkish lira has generated widespread concern. The lira has lost about 40% of its value so far this year, with daily losses of as much as 18%. Investors have extended their anxiety to other emerging markets, although not to the same degree.

Turkish President Recep Erdoğan has insisted that the crisis is the result of a “political plot.” It is true that stress between Ankara and Washington has added fuel: a dispute over a detained pastor led the White House to threaten heightened tariffs against Turkey. But markets are also reacting to imbalances in the Turkish economy and the failure of policy makers there to address them.

Turkey has a history of financial instability. The country required substantial assistance from the International Monetary Fund (IMF) in 2001; unfortunately, the mistakes made 20 years ago have recurred, providing kindling for another crisis.