Turkey’s currency is in freefall, its exports face US sanctions, inflation is rising but its president is defiant. So what’s going on in the country with 80 million inhabitants that is a key Nato ally?

What has happened to the currency? The lira fell by one fifth against the dollar last week alone. But even before the current crisis, the lira was the world’s worst performing currency, dropping by almost 50% against the dollar in the past 12 months.

Why is the lira falling so fast? Turkey’s economy faces some very challenging issues. It is running a current account deficit, combined with high levels of debt in the private sector and significant foreign funding in the banking system. 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. There are also fears of a bust in the construction sector after years of hectic growth, leaving the banks with mounting debts.

What sparked the latest rout? On Friday, the US president, Donald Trump, announced he was doubling US import tariffs on Turkish steel and aluminium. Behind the trade dispute lies a standoff over Turkey’s detention of a Christian evangelical pastor, Andrew Brunson. The pastor is facing espionage and terrorism allegations following the failed 2016 coup and his case has been taken up by religious conservatives in the US. Reports in Turkey say the US has set a deadline for Brunson’s release this week, although that has not been confirmed by Washington.

Isn’t this just a local problem for Turkey rather than the rest of us? Not judged by the reaction of global markets. The fallout saw European markets fall sharply, with investors worried about contagion effects, particularly on banks exposed to the Turkish currency. On Friday, the FTSE fell 75 points, while Germany’s Dax ended the day down 2%.

Is there going to be an IMF bailout? The IMF reckons that Turkey has the least adequate level of reserves of the major emerging market economies, which makes it vulnerable to speculative attacks. But Erdoğan has shown deep resistance to pushing up interest rates to defend the currency and quell inflation, and is likely to balk at begging for aid from the international community. Meanwhile there are concerns about political interference with the “independent” central bank, especially as the president appointed his son-in-law as finance minister.

But does it mean cheaper holidays? Yes. According to cost-of-living website Numbeo, the price of a beer in Bodrum has fallen by £2.60 to £1.60, while a couple can now enjoy a three-course meal for under a tenner at a mid-level restaurant. British holidaymakers who only a fortnight ago were getting 6.4 lira to the pound are now able to pick up 8.1 lira for each pound.