A fresh plunge in the Turkish lira sent tremors through global currency markets on Monday, amid fears that the failure of Recep Tayyip Erdoğan’s government to tackle its worsening financial crisis would have a domino effect on other vulnerable countries.

Argentina’s central bank raised its key interest rate by five percentage points to 45% after a fall in the peso and the South African rand was also hit in a day of turbulence that saw the lira fall 8% against the ­dollar.



Erdoğan lashed out at “economic terrorists on social media” as he accused Donald Trump of stabbing Turkey in the back.

But the Turkish president’s insistence that his country would survive an economic siege failed to reassure financial markets alarmed at the possible collapse of the strategically vital emerging market country.

Concerns that the 45% drop in the value of the lira this year would prove ruinous for companies that had borrowed heavily in foreign currencies prompted the renewed sell off of the lira and pushed up the cost of servicing Turkey’s budget deficit.

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Erdoğan insisted that the Turkish economy was fundamentally sound and attacked the US president for imposing sanctions and doubling tariffs on Turkey’s steel and aluminium imports last week over the house arrest of an American pastor, Andrew Brunson, on disputed terrorism charges.

“We are together in Nato and then you stab your strategic partner in the back,” Erdoğan said as he came under pressure from the markets to respond to the lira’s fall and an inflation rate of more than 15%.

Speaking at a gathering of Turkish ambassadors in Ankara, Erdoğan offered no hint that he would release Brunson and has so far made no application to the International Monetary Fund for emergency financial help. The lira would soon settle “at the most reasonable level”, he said.

Facebook Twitter Pinterest Turkish President Recep Tayyip Erdogan in Ankara. Photograph: Kayhan Ozer/AFP/Getty Images

Reto Foellmi, economist from the University of St Gallen in Switzerland, said: “As the lira has a reputation as a weak currency, Erdoğan’s rhetoric puts oil into the fire. With a further weakening of the lira, Turkey faces a downward spiral, where default could be the end.”

Although Turkey’s $300bn of dollar-denominated corporate debt makes it particularly vulnerable, currency speculators have started to assess the potential damage to Europe and to identify other emerging market countries that have also taken advantage of low global interest rates to accumulate foreign currency debts during the post-financial crisis period.

Angela Merkel, Germany’s chancellor, voiced growing concern in European capitals that Turkey’s problems could spill over into the European Union, either through losses to Spanish and Italian banks exposed to bad loans or from a politically-unpopular rise in migration.

Facebook Twitter Pinterest German chancellor Angela Merkel. Photograph: Anadolu Agency/Getty Images

Merkel called on Erdoğan to drop his opposition to higher interest rates, thereby allowing the central bank in Ankara to raise official borrowing costs from their current level of 17.75%.

“Nobody has an interest in an economic destabilisation in Turkey. But everything must be done to ensure an independent central bank,” Merkel said as the euro hit a 13-month low on currency markets.

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In the absence of higher interest rates or capital controls to defend the currency, the lira was trading at around 7.0 to the dollar in late trading on Monday. The announcement by Turkey’s central bank that it was easing financing conditions for banks failed to halt a decline that has seen the lira lose 20% of its value against the dollar so far this month.

Analysts warned that the contagion from Turkey would increase the longer it took Ankara to respond decisively to the crisis.

Play Video 1:02 Erdogan calls on Turks to buy lira 'in response to economic war' – video

Agathe Demarais, lead Turkey analyst at the Economist Intelligence Unit, said: “With an overheated and indebted economy, Turkey will require credibly orthodox economic policies, fiscal discipline and central bank independence to reverse the current situation.

“A normalisation of relations with the US could also reduce the amount of legwork that the central bank will have to do to control the economic situation, but this is unlikely to happen at the moment. In view of the domestic political and economic conditions, it is therefore unclear whether the necessary steps will be taken to contain the market fallout.”

Argentina’s central bank raised its key interest rate from 40% to 45% as the peso hit a record low, the rand was at its weakest in two years, and there was also downward pressure on the Indian rupee and the Indonesian rupiah.

In the City, UK companies exposed to Turkey saw their share prices fall. Travel firm TUI was the biggest loser in the FTSE 100, despite the fall in the lira against the pound making Turkish holidays cheaper. European banking stocks fell 1%, reflecting investor that some EU-based banks could suffer significant losses on loans to Turkish businesses.

Erdoğan’s anger at Trump has fuelled speculation that he might pull Turkey out of Nato and seek financial support from Russia and China rather than from the IMF. The Turkish president also spoke in Ankara of “economic terrorists on social media,” adding that the judiciary and financial authorities were taking action in response.

“They are truly a network of treason,” he said. “We will make those spreading speculations pay the necessary price.”



Facebook Twitter Pinterest Turkish lira currency. Photograph: Chris McGrath/Getty Images

Analysts warned that Turkey’s response had been inadequate and that the lack of effective countermeasures heightened the risk of contagion. David Cheetham, chief market analyst at foreign exchange firm XTB, said: “Calls from President Erdoğan for citizens to abstain from exchanging their currency for foreign equivalents and a statement from the Turkish interior ministry that they will look to take action against bad-mouthing the economy on social media are clearly not going to be enough to spark a recovery, and the longer this goes on without concrete steps being taken towards an amicable solution, the greater the risk of contagion.

“Other emerging market currencies such as the South African rand, the Argentinian and Mexican pesos and the Russian rouble are all looking vulnerable to further declines, while a benchmark of global emerging stock markets has fallen near to its lowest level of the year.”



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Alastair George, chief investment strategist at Edison Investment Research, said: “While deft diplomacy cannot at this stage be ruled out to defuse the crisis, the US and Turkey remain on a collision course at present. Erdoğan is keen to play the possibility of support from other allies – perhaps Russia, China and Iran.

“This is therefore more than a domestic economic or political crisis but potentially a key geopolitical turning point in respect of Nato and Turkey’s relationship with the EU.”