Updated August 30, 2018
Turkey’s Currency Crisis
Turkey, the 17th largest economy in the world, is facing a
significant currency crisis. The value of its currency, the
lira, has fallen by about 40% against the U.S. dollar since
the start of 2018 (Figure 1). The lira lost about 25% of its
value in the first two weeks of August.
The collapse in the value of the Turkish lira may pose
questions for Congress for foreign policy and economic
reasons. On foreign policy, economic instability in Turkey
could impact U.S.-Turkey relations, with tensions
heightened in recent months between the two NATO allies.
On the economic side, U.S. direct economic exposure to
Turkey is relatively low. Nevertheless, Turkey’s currency
crisis risks impacting European banks and spilling over to
other emerging markets, which could have implications for
the U.S. economy.
Figure 1. Value of the Turkish Lira: 2018 to date
Liras per U.S. dollar
Turkey’s reliance on external financing made it vulnerable
to changes in the terms and availability of credit. Turkey’s
financing costs increased as the U.S. Federal Reserve (Fed)
started increasing interest rates. Additionally, investor
perceptions of Turkey’s creditworthiness started changing.
Investors started questioning the sustainability of Turkey’s
construction boom and expansionary fiscal and monetary
policies in the months preceding the June 2018 presidential
and parliamentary elections. Increased political tensions
between Turkey and the United States also eroded investor
confidence. In August 2018, the Trump Administration
levied sanctions on two Turkish cabinet ministers deemed
responsible for detaining and prosecuting an American
pastor whose full release President Trump has demanded.
As investors became more reluctant to invest in Turkey,
demand for the lira started to fall and the currency
depreciated. Then the nominal value of Turkey’s debt (the
value of the debt in lira) rose, exacerbating investor
concerns about debt sustainability in Turkey, making
investors even more reluctant to invest and further pushing
down the value of the lira, creating a vicious cycle.
On August 10, 2018, President Trump alluded to concerns
about the lira’s depreciation when he announced on Twitter
a doubling of the steel and aluminum tariffs on Turkish
imports invoked under Section 232 for national security
concerns. Rapid depreciation of the lira generally makes it
harder for U.S. products to compete with Turkish products,
although U.S.-Turkish trade flows overall are low. Almost
immediately after the President’s tweet, the lira markedly
dropped even further.
Source: Central Bank of Turkey.
Notes: An increase in lira per U.S. dollar represents a depreciation
of the lira relative to the U.S. dollar.
Currency Crisis in Turkey
Vulnerabilities and Lira Depreciation
Since the global financial crisis of 2008-2009, interest rates
in advanced economies have been at historical lows.
International investors increasingly turned to emerging
markets to seek higher rates of return on their investments.
Turkey was an attractive destination due to economic
reforms in the early 2000s, vibrant growth (6.9% annually
on average between 2010 and 2017, compared to 3.8%
globally), and its large domestic market (it has a population
of about 80 million people). Turkish banks and large firms
borrowed heavily from foreign investors, typically in U.S.
dollars. Easy access to foreign financing supported
Turkey’s large annual current account deficits (a broad
measure of the trade balance), averaging 5.5% of GDP per
year between 2010 and 2017 and among the largest in the
Economic Implications for Turkey
Turkey’s currency crisis could create a wave of defaults
across Turkey’s banks and corporations, whose debts to
foreign creditors have nearly doubled since 2010 (Figure
2). The currency crisis makes debt payments difficult for
two reasons. First, changes in the currency have increased
their debt in terms of lira, from about 44% of GDP to
almost 80% of GDP over the course of 2018. Second, loss
of investor confidence means that banks and corporations
may have trouble “rolling over” their debt (paying off old
debts by securing new loans), forcing debt payments that
they may not have been planning. The government may
face pressures to provide assistance to banks and
corporations. This could create fiscal problems for the
government, even though it entered the crisis with relatively
modest levels of debt (28% of GDP in 2017, compared to
an average of 49% of GDP for emerging markets and
developing economies and 103% of GDP for advanced
Turkey’s Currency Crisis
Figure 2. Turkey’s Private Sector Debt: Foreign Loans
Source: Central Bank of Turkey.
Possible Policy Responses
It is not clear how the Turkish government plans to
strengthen its currency. The central bank’s foreign
exchange reserve holdings are low (less than 10% of GDP),
limiting its ability to support the lira by directly intervening
in foreign exchange markets (selling foreign currency in
exchange for lira, to increase demand for the lira).
Turkey’s central bank could appreciate the lira by rising
interest rates, but likely at the cost of curbing economic
growth. Turkish President Recep Tayyip Erdogan has
prevailed, successfully so far, on the central bank to hold
off on raising interest rates. In July, after re-election,
Erdogan gave himself the power to appoint central bank
rate-setters and appointed his son-in-law Berat Albayrak to
serve as treasury and finance minister, exacerbating
investor concerns about central bank independence and the
politicization of monetary policy.
Finance Minister Albayrak has also ruled out two other
possible policy responses: capital controls and financial
assistance from the International Monetary Fund (IMF).
However, a number of outside observers speculate that
Turkey will need an IMF financial assistance package at
some point, even though the policy reforms attached to IMF
funds have been politically unpopular in Turkey in the past.
Qatar extended a $3 billion currency swap agreement to
Turkey in late August as part of a larger $15 billion
investment package for Turkey. The currency swap
agreement increases the availability of dollars in Turkey but
some analysts are skeptical it is sufficient to stabilize the
lira. The German government is also reportedly considering
providing emergency financial assistance to Turkey. Easing
political tensions with the United States could also increase
investor confidence in Turkey, but the prospects for doing
so are unclear.
Implications for the U.S. Economy
Overall economic ties between the United States and
Turkey are relatively weak. Turkey accounts for less than
1% each of U.S. merchandise exports, U.S. merchandise
imports, U.S. direct investment overseas, foreign direct
investment in the United States, and the overseas claims of
U.S. banks. Turkey has stronger ties with Europe, and the
European Central Bank has expressed some concerns about
European bank exposure to Turkey. Given strong U.S.-EU
economic ties, banking instability in Europe could
negatively impact the United States.
An impact on the U.S. economy could also be felt if
Turkey’s crisis spreads to other emerging markets that are
similarly reliant on external financing and negatively
impacted by rising U.S. interest rates. Argentina, facing
similar pressures, turned to the IMF for financial assistance
in June 2018. Rapid depreciation of the lira has caused the
value of Brazilian, Indian, Mexican, and South African
currencies to fall as well, fueling concerns about contagion
effects. If Turkey’s crisis spills over to other emerging
markets, a broader crisis across several emerging markets
could have significant implications for the U.S. economy.
However, there are a number of factors specific to Turkey
driving the crisis, and some analysts are hopeful that the
crisis can be contained if investors focus on the
fundamentals specific to each country.
Questions for Congress
Are U.S. financial institutions sufficiently capitalized
and diversified to withstand potential defaults on
outstanding debts by Turkey and/or other emerging
How does the lira’s depreciation affect global steel and
aluminum markets, including U.S. production? Are
higher steel and aluminum tariffs effectively offsetting
changes in exchange rates, or exacerbating exchange
The United States plays a leadership role in shaping
IMF policies. Does Turkey need an IMF program? If so,
under what conditions would the United States support
such a program? Turkey has been a repeat IMF
borrower, with 19 programs, the most recent of which
ended in 2008. How would a new program be similar to
and different from previous programs?
Turkey is a major recipient of financial assistance from
some multilateral development banks. Should the
multilateral development banks adjust funding levels in
light of currency instability? Should the European Bank
for Reconstruction and Development (EBRD) be
heavily invested in Turkey, given its mandate to operate
in countries committed to multiparty democracy and
What political issues should affect U.S. considerations
regarding Turkey’s currency crisis, and what effect is
the crisis likely to have on those issues?
To what extent is the crisis in Turkey driven by factors
specific to Turkey or more broadly shared among
emerging markets? Are problems in other emerging
markets likely to arise if and when the Fed continues to
raise interest rates?
For more information on Turkey, see CRS Report R44000,
Turkey: Background and U.S. Relations In Brief, by Jim
Zanotti and Clayton Thomas, and CRS In Focus IF10961,
U.S.-Turkey Trade Relations, by Shayerah Ilias Akhtar.
Rebecca M. Nelson, Specialist in International Trade and
Turkey’s Currency Crisis
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