Although these political actors and their administrations can trigger momentary movements (and in this case, their basically unrelated actions accelerated the currency\u2019s weakening), the underlying causes of the market turmoil\u00a0run much deeper<\/a>.<\/p>\n Since Mr. Erdogan\u2019s Justice and Development Party (AKP) took power in 2002, the Turkish economy has grown at a breakneck pace. However, as Turkey\u2019s low savings rate did not provide sufficient capital, economic growth was largely financed in foreign currencies, especially in U.S. dollars and euros. This made Turkey\u2019s rapid expansion dependent on foreign investment and capital inflows, and drastically increased business liabilities in foreign currencies. Since the country needs to import almost all of its energy along with most intermediate goods for exporters, it also runs a structural foreign trade deficit, worsening its payments balance.<\/p>\n With the U.S. Federal Reserve and the European Central Bank following policies of low or negative interest rates, Turkey \u2013 which offered higher yields and fast economic growth \u2013 was confronted with an excessive inflow of foreign capital. This kept the lira exchange rate strong.<\/p>\n When the Fed started \u201ctapering\u201d \u2013 in other words,\u00a0phasing out quantitative easing<\/a>\u00a0and reintroducing higher interest rates \u2013 investors responded by cutting their exposure to emerging markets. Countries such as Brazil, Indonesia and Turkey were left without enough capital to keep financing growth.<\/p>\n <\/p>\n In the meantime, following the example of the U.S. and many European Union governments, Turkey tried to further stimulate the economy with strong public expenditures and interest rates that were perhaps lower than necessary. These policies have now resulted in downward pressure on the lira.<\/p>\n Given the export orientation of Turkey\u2019s economy, there were good reasons for monetary policymakers to be wary about increasing interest rates, which could have resulted in a strongly overvalued lira. However, once the currency began to weaken, the large foreign debt of Turkish businesses became a very serious problem.<\/p>\n The Turkish economy is now caught in a vicious circle, partly due to its structural imbalances, but also to the unintended consequences of global monetary policies. The lira is becoming drastically oversold, just as it was probably overvalued in the recent past. This is the same trap that other smaller currencies have fallen into, because they are exposed through trade and investments to the extreme policies in the large currency areas \u2013 the U.S. dollar and the euro.<\/p>\n Washington cannot be blamed for these problems. However, taking advantage of Turkey\u2019s financial difficulties to secure political gains (freeing Mr. Brunson, blocking procurement of Russian arms, influencing Ankara\u2019s policies in Syria) will only worsen the lira\u2019s downward spiral. In the long term, it might prove shortsighted. Experience shows that\u00a0political bargains<\/a>\u00a0are more likely to be struck through quiet diplomacy, applying leverage behind the scenes, rather than by twisting arms in public. That only makes the negotiating partner lose face.<\/p>\nTaper victim<\/h2>\n
![](\"https:\/\/www.gisreportsonline.com\/static\/gis\/images\/report_quote.png\")
Following the example of the U.S. and EU members, Turkey tried to stimulate the economy with strong public spending<\/p>\n<\/div>\nSerious error<\/h2>\n