First, it has a high level of debt due for repayment in the near future - loans that have to be repaid and the money borrowed anew. To use the language of the financial markets, the debt has to be refinanced. Credit rating agency Fitch estimates that Turkey's total financing needs this year will be almost $230bn.<doc-sep>Rapid inflation, a tanking currency and political influence on fiscal policy has plunged Turkey’s economy into crisis. While European leaders and analysts have called on Turkey to boost interest rates and cool down its overheating economy, President Recep Tayyip Erdoğan has defiantly panned western powers for waging “economic war” on his country. ADVERTISEMENT Easy loans from European banks had helped Turkey fuel a massive, debt-funded expansion that boosted the country’s economy but also spurred rampant inflation. Those banks now face billions of euros in losses as the falling value of the lira makes Turkish debt much harder to pay off. The U.S. has a limited direct financial stake in Turkey, but a prolonged financial crisis there could spread chaos through financial markets and pose new national security challenges for the Trump administration. The crisis in Turkey comes as the country has been mired in a dispute with the United States over the detention of Pastor Andrew Brunson, which has raised the ire of President Trump Donald TrumpTrump lashes out after grand jury seated for New York criminal probe Schumer tees up vote on Jan. 6 commission bill Senators struggle to save Jan. 6 commission MORE. Here are five ways an economically battered and isolated Turkey could pose consequences for U.S. interests. Turmoil in emerging markets and tough losses for EU banks U.S. banks have a limited presence in Turkey with just $38 billion in total claims on the country, according to an analysis from Pantheon Macroeconomics. Turkey also accounts for just 1.4 percent of global GDP, which makes U.S. banks relatively safe from direct harm. “Even if all these claims were to be written off — they won't be — the impact on the U.S. banking system would be minimal,” wrote Pantheon chief economist Ian Shepherdson in a research note Tuesday. “It's bad for some European banks, whose Turkish customers are now going to struggle mightily to service their debts. But it is not a serious threat to the U.S. economy,” Shepherdson wrote. But Turkey’s financial crisis has already spawned turmoil in other emerging markets like China, where the U.S. and its allies face much larger stakes. Investment funds tracking developing economies have fallen sharply since Friday and the crisis has also roiled Chinese equity and currency markets, meaning the U.S. economy and financial markets may still be impacted. More trade tensions between the US and Turkey Turkey's economic crisis comes as President Trump has intensified a trade dispute with the country by doubling steel and aluminum tariffs on exports from Turkey. Turkey had already been impacted indirectly after the U.S. imposed tariffs on the European Union, with whom Turkey shares a customs union. Turkey, which has previously imposed tariffs on U.S. agricultural exports, responded to the U.S. actions last week by slapping another round of steep tariffs on U.S. goods Wednesday. Turkey's latest tariffs include a 50 percent tax on U.S. rice, 140 percent on spirits, 60 percent on tobacco and 120 percent on cars. "Recent developments in the U.S.-Turkey relationship threaten both countries’ economic interests and put at risk an alliance that has proven its value over decades," said Myron Brilliant, U.S. Chamber of Commerce executive vice president and head of international affairs. Crisis hinders US, EU response to Russia The Turkish financial crisis is the latest threat to the country’s ties with the U.S. and the European Union, pushing apart key allies in challenging Russian aggression. EU leaders have called on Erdoğan to accept interest rate hikes and other measures to stabilize Turkey’s economy and ween it from its reliance on foreign debt. Erdoğan has refused to do so and blamed the crisis on western “economic terrorists,” including the U.S. Trump has also imposed financial sanctions on two top Erdoğan officials over the detainment of Brunson. He also signed Tuesday a massive defense spending bill that bans the sale of F-35 fighter jets to Turkey, which Ankara has helped develop. Erdoğan has responded by rallying Turks against the U.S. and seeking closer economic ties with Russian President Vladimir Putin. The deepening divide among NATO members could weaken attempts to respond to various Russian actions such as Kremlin-backed cyber attacks, electoral interference in various countries and its occupation of Ukraine. Further unrest in the Middle East, complicating life for Trump Turkey has been a key member of the international coalition fighting the Islamic State in Iraq and Syria (ISIS), and its woes have the potential to disrupt the fight at a pivotal moment. Turkey already stalled momentum in the fight against ISIS when the country earlier this year launched an offensive against Kurdish forces in northern Syria. That forced U.S.-backed Kurds fighting ISIS to leave the fighting and help their brethren, pausing the battles against the terrorist group in the Middle Euphrates River Valley. Ankara considers the Kurdish fighters as terrorists connected to outlawed Turkish Kurdish separatists, while Washington sees them as the most effective native fighting force on the ground in the Syria. Turkey and the United States appeared to reach a breakthrough in their impasse over the Kurds when they reached an agreement in June on a “Manbij Roadmap” that sets the withdrawal of the Kurds from that city. The new tensions threaten to derail that progress just as the coalition plans a final push to rout ISIS, but officials have downplayed any connection. “We've seen no change in our relationship with our Turkish allies,” U.K. army Maj. Gen. Felix Gedney, the coalition’s deputy commander for strategy and support, told reporters at a Pentagon briefing Tuesday. So what happens to Güllen? One of the root causes of U.S.-Turkish tensions has been a Muslim cleric living in Pennsylvania. Erdoğan blames Fethullah Gülen for the 2016 failed coup attempt against him and has demanded the U.S. immediately extradite the cleric. But the U.S. has been unwilling to do so, citing Gülen’s due process rights. Gülen is a legal U.S. resident who has lived in rural Pennsylvania since 1999 after fleeing Turkey. He and Erdoğan were allies before Erdoğan turned on him, and Gülen denies any responsibility in the coup. Turkish officials have linked the release of Brunson, arrested in 2016 under suspicions of aiding the coup, with Gülen’s extradition. "They say 'give us the pastor.' You have a preacher [Gülen] there. Give him to us, and we will try [Brunson] and give him back," Erdoğan said in September.<doc-sep>The dramatic fall in the Turkish lira over the last few days has rattled global markets, even though experts don't expect the troubles facing Turkey to trigger the next financial crisis. Turkey accounts for less than 1 percent of the world economy and global exposure to the Turkish banking sector is also small, experts said. Spanish banks are the most exposed to the Turkish financial system, but they constitute just 4.5 percent of overall assets, according to data by the Bank for International Settlements and J.P. Morgan Asset Management. "The numbers there don't really worry me. I think it's more about sentiment," Sat Duhra, a portfolio manager at Janus Henderson Investors, told CNBC's "Squawk Box" on Wednesday. He added that developments in Turkey have added "more fuel to the fire" at a time when investors are increasingly jittery over escalating trade disputes, rising interest rates in the U.S. and China's softer economic outlook. Losers: Emerging markets and banks Against that backdrop, emerging markets — which Turkey is part of — have become the biggest casualty in the recent market rout. The iShares MSCI Emerging Markets exchange-traded fund, a passive investment product that tracks the index, has fallen by more than 1 percent this week even though Turkey makes up only 0.6 percent of the underlying assets. Investors have been pulling money out of the broader emerging markets for fear that other countries, especially those with poor financial positions, will follow in Turkey's footsteps. Such withdrawals have hurt other currencies: The and Argentine peso touched their weakest levels against the U.S. dollar earlier this week. But such fears may be unfounded, experts said. "Turkey's crisis raises concerns about more fragile emerging-market countries that similarly carry larger current account deficits like Brazil, South Africa, and Argentina," Wells Fargo Investment Institute said in a Tuesday report. "It is important to remember that emerging-market countries, on the whole, have much stronger financial positions than they did 20 years ago," it added. Despite the limited exposure to Turkey's financial system, bank stocks in the U.S., Europe and Japan were also hit. European banks such as Spain's BBVA and Italy's UniCredit, which have units in Turkey, this week saw their shares fall by 3.3 percent and 4.6 percent respectively. Turkish banks are vulnerable in the current situation because companies have accumulated a high level of debt in foreign currencies, which they may find increasingly difficult to pay back given the weak lira. The country's total borrowing denominated in currencies other than the lira has grown to more than 50 percent of its gross domestic product — and much of that debt is held by companies. Investors are concerned that weakness within Turkish banks may spill over to foreign lenders that have assets in the country. "The weak spot in this whole set up is the banking system. I think right now, we're still in an okay place. If we're still in the same situation in nine to 12 months, I think the banks here are the weakest link," Nafez Zouk, lead emerging markets economist at Oxford Economics, told CNBC's "Capital Connection" on Wednesday. Winners: US dollar and EU-Turkey relations<doc-sep>
Turkey’s currency crisis is by no means a black swan event as trouble had been brewing in the country for several months. Still, fears of a spillover effect from the troubles in the world’s 17th largest economy played havoc with the global financial markets Friday as panicked investors ran for cover. Turkey is an emerging-market economy with a population of roughly 80 million. It is a founding member of the Organization for Economic Cooperation and Development and is among the early signatories of the General Agreement on Tariffs and Trade, an international pact that promotes reducing trade barriers. It is also a part of NATO, making it a key military ally of the U.S. Historically, the country has parlayed its geographic location to serve as an important bridge between the East and the West. Stratfor Yet, the image the world holds of Turkey in recent years has been colored by headlines about President Recep Tayyip Erdogan’s authoritarian rule and mounting criticism over his government’s inept handling of the economy. Making matters worse, Ankara is in the midst of a diplomatic row with Washington over its detention of pastor Andrew Brunson on espionage charges. In addition to sanctioning two Turkish officials last week, President Donald Trump on Friday announced via Twitter that he has authorized doubling tariffs on steel and aluminum imports from Turkey. Iron and steel exports to the U.S. totaled $885 million in 2016, according to the Office of the U.S. Trade Representative. In the most visible sign of deteriorating confidence in the country, the Turkish lira USDTRY, +0.02% sank to its lowest level against the U.S. dollar with the buck buying 6.42 lira versus 5.55 earlier. The plunge in the currency could easily push Turkey to the brink given its elevated debt burden and perhaps force the government to seek a bailout. Turkey’s external debt reached $466.67 billion, or 53% of its gross domestic product, at the end of March with about one-fourth in short term debt which will come due within the year, reported Anadolu Agency, a government-run news agency. In comparison, Deutsche Bank estimates Turkey’s foreign currency-denominated debt at closer to 70% of GDP. Read:Cost to insure Turkish debt spikes as Turkey teeters on brink of currency crisis The U.S. dollar, as represented by the ICE dollar index DXY, +0.05% jumped 0.9%, in part due to a belief that Turkey’s problems are not expected to have a major impact on the U.S. Read: Dollar index jumps to 14-month high as Turkey’s lira gets rocked to historic low See: 3 reasons the selloff in Turkey’s lira matters for markets all over the world Meanwhile, U.S. stocks fell sharply as Turkey underscored global risks at a time when major central banks, led by the Federal Reserve, are shifting to tighter monetary policy regimes. The S&P 500 SPX, +0.19% shed 0.7% to close at 2,833.28 and the Dow Jones Industrial Average DJIA, +0.03% fell 0.8% to 25,313.14. Read:Stocks fall as Turkey’s currency crisis spotlights global risks See:Here’s what it will take to push Wall Street’s buttons There are also contagion fears, particularly for Europe given its nearly $180 billion in trade with Turkey as well as sizeable loans to the country. European Commission All European stock markets closed lower with the Euro Stoxx 50 SX5E, -0.11% falling 2%. Read:European stocks end sharply lower as Turkey contagion fears spook investors See:FTSE 100 ends lower as Turkey contagion angst grows, but retains slight weekly gain Gold US:GCZ8, which tends to gain when investors are unwilling to take on risk, did not benefit much from the developments in Turkey with the precious metal settling almost unchanged on Friday at $1,219 an ounce. Read:Gold closes slightly lower as dollar’s jump outweighs Turkey contagion fear