US president has tweeted that ‘our relations with Turkey are not good at this time!’

This article is more than 2 years old

This article is more than 2 years old

Turkey’s unfolding economic crisis has deepened further after Donald Trump announced he was doubling US import tariffs on Turkish steel and aluminium, stoking the country’s currency freefall and rattling financial markets.

The Turkish lira plunged by more than 20% against the dollar after the president announced the move, amid a widening dispute between Washington and Ankara over the imprisonment of the US pastor Andrew Brunson.

Pressure has been applied on the country in recent days to stage an emergency interest rate rise to avert further economic damage.

Revealing an increase in US taxes on Turkish steel imports to 50% and on aluminium to 20%, the president tweeted: “Our relations with Turkey are not good at this time!”

Donald J. Trump (@realDonaldTrump) I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!

Even before Trump’s tweet, the lira had plunged 14% as investors rushed for the exits, choosing to buy the dollar, yen and other assets seen as safe havens during times of financial market volatility. The lira has been under sustained pressure on foreign exchanges, dropping by almost 50% against the dollar in the past 12 months and hitting a succession of record lows this week.

Inflation reached an annual rate of 15.9% in July – more than five times the average rate for wealthy nations – and government borrowing in foreign currencies has risen dangerously high.

Recep Tayyip Erdoğan, having secured sweeping new powers in presidential elections this summer, tried to restore confidence in the currency on Friday in a speech filled with nationalist rhetoric but offered little to calm the international currency markets.

Raising the spectre of shadowy forces influencing the currency, he told Turks to use “gold under the pillow” to support the lira, while saying: “Don’t forget, if they have their dollars, we have our people, our God.”

Financial markets reacted badly and stock markets across the world dropped after Trump escalated the situation on Friday. Shares in European banks with sizeable operations in Turkey fell amid fears of contagion, including Spain’s BBVA, Italy’s Unicredit and France’s BNP Paribas.

Turkey’s trade minister, Ruhsar Pekcan, said the country was “deeply disappointed” by Trump’s decision and warned that the move would also affect US companies.

“Repeated efforts to communicate to the US administration that none of the stated criteria driving America’s tariffs are applicable to Turkey have thus far proven fruitless,” she said.

“Nevertheless, we implore President Trump to return to the negotiating table – this can and should be resolved through dialogue and cooperation.”

Ranko Berich, the head of market analysis at Monex Europe, said the Turkish president’s combative speech had further damaged international trust in its currency. “Erdoğan has reached for the crazy stick and given the lira another whack in a rambling speech that focused more on combative rhetoric than addressing market concerns,” he said.

Observers said the dispute could have broader implications for geopolitics and the situation in Syria and the Middle East if Turkey moves closer to Russia as a result.

David Chmiel of the political consultancy Global Torchlight said: “My initial reaction to the announcement from Trump was this was going to be another perceived knife in the back in terms of Erdoğan’s relations with the west.”

Emergency support from the International Monetary Fund has been mooted as an option for the country to save itself from the deepening crisis, although there are questions over whether Erdoğan would accept the strings that would come with any bailout deal.

Profile What is the IMF? Show Hide What is the IMF? The International Monetary Fund, created in 1945, is an organisation of 189 countries based in Washington DC. It is governed by, and accountable, to member countries.

Its goals are to ensure the stability of the international monetary system (exchange rates and international payments), to secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.

The IMF has bailed out scores of countries over the years, including the UK in 1976 when the minority Labour government borrowed £2.3bn from the fund to stabilise the value of the pound; Iceland in 2008; and Greece in 2010, 2012 and 2015.​ The number of bailouts of African countries has also increased in recent years as states became more vulnerable to commodity price crashes.

The IMF was conceived at a UN conference in Bretton Woods in the US in July 1944 to build a framework for economic cooperation to avoid the devaluations that contributed to the Great Depression of the 1930s.

​Most funds for IMF loans are provided by members via payments based on their position in the world economy, although the IMF can also borrow. Its decision-making also reflects members' relative influence. The Fund, as it is known, is one of the world’s biggest holders of gold. Photograph: Yuri Gripas/X00866

Given the sizeable personal control Erdoğan commands over the running of the Turkish economy – after granting himself the right to appoint the central bank’s governors and naming his son-in-law as finance minister – economists reckon the government will attempt to muddle through.

However, the Turkish central bank has limited foreign exchange reserves to deploy to support the lira, stoking talk among economists of the nation using capital controls to halt the flow of money leaving its shores instead.

Analysts said raising borrowing costs aggressively in the coming days could help. Paul Greer of the fund management company Fidelity said an increase in interest rates of 1,000 basis points would be a “good start”, although he said this would probably tip the economy into recession.

Large sums borrowed in foreign currencies make Turkey especially vulnerable to a falling domestic currency because it becomes more expensive to pay off its debts.