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What happens to Turkey now?

What happens to Turkey now?

It all started with the confinement of an American evangelical pastor allegedly for being among those behind the failed coup in Turkey. An enraged Donald Trump decided to impose economic sanctions in a way that would cripple the country. That is precisely what has happened to a strategic partner of the US and a member of the NATO. But, the worst may be yet to come. The Turkish lira has dropped more than 40 per cent against the dollar since January, thrashed by a potent mix of confrontational politics, economic policy confusion and US interest rate hikes. The escalation of the spat with the United States has fuelled volatility and further devalued the lira against other currencies. President Recep Tayyip Erdogan has struck a defiant tone in recent days, dismissing calls for emergency measures that would support the lira and stem the flood of money leaving Turkey. Re-elected in June, Erdogan has further unnerved investors by resisting interest rate hikes, the crisis antidote prescribed by economists. With inflation already running in the double digits, the currency slide promises to make imported products much more expensive in Turkey. Even a recession and a debt crisis that would force Turkey to implement capital controls and ask for an IMF bailout cannot be ruled out. Turkey could now seek a cash injection from an outside source, but its options are limited. Unlike recent bailout recipient Greece, Turkey is not a member of the European Union and it does not use the euro. Relations with the United States have seldom been more strained. The Trump administration has announced plans on to double metals tariffs. The Turkish leader may have more luck with China, Qatar, or Russia. Erdogan spoke to President Vladimir Putin, a conversation that included talk of deeper economic ties and mutually beneficial trade, according to Russian state media. Investors have been especially unnerved in recent weeks by a lack of action by the Turkish central bank, which shocked markets last months when it declined to hike interest rates in the face of rampant inflation. Although Erdogan says he opposed interest rate hikes, he has not made a clear argument for why Turkey's central bank should keep rates low. Markets would welcome a cooling of tensions with the United States. There were few signs that Erdogan would back down. "You are a strategic partner in NATO and on the other hand you stab your ally in the back? Is this acceptable?" Erdogan asked. Should the crisis persist, Erdogan may be forced to change his tactics. He will try everything to prevent an IMF bailout, because they would come in and demand strict austerity. It would be a big political loss for him.

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