A Turkish diplomatic delegation is set to visit Washington Thursday to ease tensions. Reports of the visit helped to stem a sharp drop in the value of Turkish currency. Analysts warn rising U.S.-Turkish tensions are threatening to trigger a financial crisis in Turkey.
On Monday, the Turkish lira suffered its most significant drop in a decade. The sell-off triggered by reports that the Trump administration is considering ending Turkey’s duty-free access to the U.S. market.
The lira recovered some of its heavy losses on news of the diplomatic visit. But the currency began to slide again Tuesday as subsequent reporting contradicted initial reports that a preliminary agreement had been reached between Ankara and Washington.
Turkey’s deputy foreign minister Sedat Onal is reportedly set to lead the delegation, according to a foreign ministry source. Earlier reports suggested a far more powerful delegation would be sent to Washington, including foreign, interior, defense, and finance ministers.
The agenda is expected to focus on discussions about the ongoing detention of U.S. pastor Andrew Brunson, who is currently under house arrest while standing trial on terrorism charges. The White House dismisses the charges as baseless, accusing Turkey of hostage taking.
U.S.-Turkish tensions escalated last week, with U.S. President Donald Trump targeting two Turkish ministers with sanctions over Brunson’s detention. Turkey hit back with reciprocal measures.
“He [Brunson] now has acquired symbolic importance more than the worth of the issue. And with him will be tied all the Americans detained, and the State Department employees in Adana, Istanbul and Ankara,” said international relations expert Soli Ozel of Istanbul’s Kadir Has University.
Three locally employed consular and embassy officials are being held on terrorism charges.
“Things have piled out over the course of several years, which all needs to be solved,” Ozel said. “For that to happen, things really have to calm down — the hysteria on both sides of public opinions.”
Turkish President Recep Tayyip Erdogan may have already prepared the ground for a compromise. He has carefully avoided personally attacking Trump.
“He opened a good room for maneuver by disassociating Trump from this wrongdoing, basically saying he was misled,” Ozel said. “If this thing is allowed to subside, good diplomats can actually find a way out.”
The U.S. Embassy in Turkey, too, sought to calm relations, tweeting Tuesday, the “U.S. continues to be a solid ally and friend of Turkey despite tensions. The two countries have an active economic relationship.”
The embassy also emphatically denied widespread Turkish media reports quoting an unnamed U.S. official predicting further heavy declines in the Turkish currency.
Analysts suggest both sides have considerable experience resolving differences.
“Turkey’s relations have always been troubled,” noted international relations professor Huseyin Bagci of Ankara’s Middle East Technical University. “Even in the 1970s the relationship was described as the troubled partnership. The question today is, are the problems solvable?”
There is a myriad of outstanding disputes between the two NATO allies. Relations are strained over Ankara’s deepening ties with Moscow, in particular, and the planned purchase of Russia’s S-400 missile system. Washington said the missiles threaten to compromise NATO systems.
Additionally, Ankara is refusing to enforce reintroduced U.S.-Iranian sanctions while differences over Syria remain and Turkish demands to extradite U.S.-based Turkish cleric Fethullah Gulen, who is blamed for the 2016 failed coup in Turkey.
International investors are expected to watch Thursday’s visit closely. Success would likely dial back fears that Washington could impose painful financial sanctions that would hit Turkey’s fragile economy hard, adding further pressure on the currency. Failure would probably trigger another sell-off.
Turkish banks and corporations owe hundreds of billions of dollars in loans, many of which are due within a year. With the lira already falling by around 30 percent since the start of the year, concerns are growing over the ability to repay the debt.
Investors are also alarmed over the economic policies pursued by Erdogan, in particular his aversion to raising interest rates to rein in rampant inflation.
Given the precarious state of Turkish financial and economic markets, Ankara presumably has little room to maneuver with Washington. However, success will likely offer at best, limited respite since international investors’ concerns center on Turkey’s financial imbalances and the failure of Erdogan to address them.
“The current level of real policy rate is insufficient to compensate for the heightened geopolitical risk premium after U.S. sanctions, which will keep the lira vulnerable to a further escalation of geopolitical tensions,” said Inan Demir, the London-based economist at Nomura Securities, in a note to clients.