Trump’s war with Turkey

THE president of Turkey, Recep Tayyip Erdogan, styles himself a strongman. Just like Vladimir Putin, he is quick to blame his country’s ills on foreign plots and to imprison his critics as traitors.

But Erdogan has now clashed with a strongman as stubborn as himself, only much more powerful — U.S. President Donald Trump. And the fallout threatens not only to trigger a worldwide financial panic but to destroy the West’s relations with its closest Muslim ally.

The crisis began when Erdogan dared to defy Trump on two recent U.S. demands. The first was to release an American pastor, Andrew Brunson, who was working as a missionary in Turkey two years ago when he was jailed on dubious terror charges.

Punitive

The second demand was to reimpose sanctions on Iran, following Trump’s decision to pull out of a 2015 nuclear pact that President Obama had struck with the country.

Trump’s punishment for Erdogan’s failures to comply with the demands was swift and devastating.

With a single tweet announcing punitive tariffs on Turkish exports, the U.S. President single- handedly sent the Turkish lira into freefall.

In the past week alone, the Turkish currency has lost more than a third of its value, sending inflation rocketing to 15 per cent and threatening a full- scale default by Turkish businesses.

Erdogan, predictably, responded by denouncing Trump’s draconian tariffs as ‘a stab in the back’ and calling journalists who spread ‘false news’ about the country’s reeling economy ‘traitors’.

In truth, though, most of Turkey’s economic problems are home-grown. Over the past decade, Erdogan’s increasingly authoritarian behaviour — appointing his son-in-law as finance minister, for example, and refusing to allow Turkey’s central bank to raise interest rates — have undermined the economy.

Over the same period, leading Turkish businesses borrowed dollars and euros cheaply at the West’s low interest rates, accumulating vast debts that they now cannot pay back because of the collapse of the lira.

Worried foreign investors are pulling out of the country, effectively disposing of lira for other more stable currencies. This has caused the value of the lira to fall further, pushing the country even closer to the financial abyss.

And the prospect of a fullscale default by Turkey is beginning to spark a panic across all emerging markets that could snowball into a much wider crisis.

Investors from the U. S., Europe and Japan have lent billions to governments and companies in emerging markets. Already, fears of a stampede away from volatile non-Western assets have sent jitters through stock markets and currencies from South Africa to Argentina and India.

The lira’s fall has contributed to Argentina’s peso and India’s rupee plunging to record lows, while Russia’s rouble, South Africa’s rand and Indonesia’s rupiah all traded at their weakest for two years.

Yesterday, Turkey’s decision to impose tariffs on U.S. goods renewed fears of a trade war with America. Coupled with concern that Turkey’s debt worries could spread, this caused jitters on global stock markets. Even the promise of a $ 15 billion (£ 11.8 billion) investment from Qatar in Turkey’s fragile economy was not enough to ease concerns.

The contagion is now spreading to Western markets. EU banks’ exposure to Turkey is around £79 billion and many European lenders — such as Italy’s Uni Credit, Spain’s BBVA and France’s BNP Paribas — own stakes in Turkish banks and face heavy losses that could trigger a crisis in the euro.

We have been here before. In 1997, a currency collapse in Thailand escalated into what became known as the Asian Financial Crisis, when investors fled emerging markets, unleashing economic and political chaos across countries including Russia, Argentina, Indonesia and South Korea, which defaulted on their foreign currency debts.

The lesson for today is that once one highly indebted economy starts to unravel, others tend to follow. And the consequences are more than just economic — the 1997 crisis shaped the world’s politics for two decades. For that financial meltdown was a key factor in the rise of Putin and Erdogan, who both came to power promising to impose order on their countries’ shattered economies.

Furthermore, the breakdown in relations between the U.S. and Turkey could also have profound consequences for the security of the West.

Turkey’s army is the second largest in Nato, and the massive Incirlik airbase is vital for British and U. S. operations in Syria, Iraq and Afghanistan.

Yet over recent years, as the U.S. and EU have criticised Erdogan for imprisoning political opponents and closing independent media outlets, he has drifted ever closer to Putin.

Toxic

Last year Erdogan signed a multi-billion-dollar deal to buy rockets from Russia, and he has also brought in Russians to build a new nuclear power station. Although Erdogan and Putin have backed different sides in the Syrian conflict, the two leaders now make a habit of lavishly praising each other while denouncing America and the West.

Erdogan is also increasingly styling his personal rule on Putin’s. Almost all Turkish media is now under the control of Erdogan-friendly oligarchs.

Since a coup attempt in July 2016, Erdogan has jailed more than 150,000 political activists, academics, journalists and army officers suspected of opposing his rule. Turkey, once hailed as a beacon of democracy, has regressed to a one-man rule underpinned, like Putin’s, by a mixture of toxic nationalism and antiWestern hysteria.

The crisis could have serious repercussions for Europe, too. Turkey is the main buffer state between Europe and Syria. It is the temporary home of more than three million Syrian and other refugees, all desperate to get into the EU.

In 2017, Erdogan struck a deal with German Chancellor Angela Merkel to reduce the flow of migrants streaming from Turkey into Greece in exchange for visa-free travel for Turks to Europe, coupled with a generous slab of economic aid to help with the cost of housing the migrants.

Bully

Now that deal could be in jeopardy. If Europe doesn’t offer Turkey a bailout, Erdogan could order his border police to turn a blind eye to new flows of migrants. To spite America, he could sign security accords with Russia over their shared borderlands in the Caucasus and the Black Sea, throwing Nato into crisis.

Both Erdogan and Putin like to trumpet their countries’ independence from Western hegemony, but the economies of Turkey and Russia depend heavily on Western finance.

Erdogan can do three things to avert disaster. Release Pastor Brunson and toe Washington’s line on Iran. Also, reassure investors that he will reform cronyism in the Turkish banking system and raise interest rates to protect the lira.

But eating humble pie and accepting foreign advice isn’t Erdogan’s style.

More likely is that he will try again to bluster and bully his way out. He could threaten Europe with migrant Armageddon unless his country’s debts are restructured. And he could threaten the U.S. by restricting access to Nato facilities in Turkey.

Worse, his macho reaction to the crisis increases the risk of a local meltdown turning into a worldwide financial rout.

This would reverse a decade of remarkable growth in emerging markets and launch a new season of economic and political turmoil across the world.