Political turmoil in Turkey and the country’s escalating dispute with the Trump administration spilled into global financial markets on Friday, driving the country’s currency to a record low.
The plunge in the Turkish lira raised fears that Turkey’s problems could infect Asian and European banks that have invested in the region and contributed to declines in stock markets around the world.
On Friday, a dollar would have briefly bought more than six lira, a new record, though the Turkish currency later recovered some of its losses.
Overall, the currency has lost more than 15 percent of its value against the dollar this week. The yield on Turkish 10-year bonds have also sharply risen, to nearly 20 percent, meaning traders are demanding much higher returns for what they see as an increasingly risky investment.
It was the latest example of how troubles in a country with a relatively small economy, but big problems, could threaten financial stability further afield.
The loss of confidence in the lira can at least be partially attributed to Turkey’s clash with the United States over the detention of an American pastor, Andrew Brunson, who was swept up in a crackdown after a failed attempt in 2016 to oust President Recep Tayyip Erdogan.
Washington has imposed sanctions against two ministers in Mr. Erdogan’s government, and Ankara has retaliated. Representatives of Turkey and the United States met in Washington this week but failed to resolve the conflict.
Turkey’s jailing of Mr. Brunson “and the associated diplomatic row continues to hurt the country’s assets,” Jim Reid and Jeff Cal, analysts at Deutsche Bank, said in a note to investors Friday. “Countries that are in a diplomatic battle with the U.S. at the moment (e.g. China, Turkey and Russia),” they wrote, appeared “to be suffering in the markets.”
But Turkey’s problems go much deeper than its troubled relations with the United States, a NATO ally.
There is widespread fear among foreign investors that Mr. Erdogan’s populist, authoritarian government is pursuing irresponsible economic policies while undercutting the independence of the central bank, preventing it from taking steps that would rein in galloping inflation and stem the fall of the lira.
The sharp decline, and worries over the wider consequences of economic turmoil in Turkey, helped drive the main stock indexes in Tokyo, Frankfurt and Paris more than 1 percent lower.
As was the case when Greece helped cause a financial crisis a decade ago, the reaction in the markets was out of proportion to Turkey’s importance to the world economy.
Investors fear that banks in Asia and Europe could suffer because they have invested in Turkish assets like stocks, bonds or the currency itself. Problems at banks could then spread to other sectors of the economy.