AUDIE CORNISH, HOST:
Over the weekend, the Turkish lira hit a new low against the U.S. dollar. It didn't help that on Friday, President Trump had stepped up tariffs on Turkish steel and aluminum. Now there are growing fears that Turkey's currency woes could spill over to other countries. To understand why, we're joined by global economist Eswar Prasad. Welcome to the program.
ESWAR PRASAD: My pleasure.
CORNISH: Before the U.S. announced the increase in tariffs, Turkey's currency was already struggling. What was going on in the country that led to this?
PRASAD: It's been a long slide down for the currency. Five years ago, you could get two Turkish liras for a dollar. Now you can get seven Turkish lira to the dollar. Giving you some indication of how much the currency has fallen, it's fallen by about half in value this year.
What's happened is that since Mr. Erdogan was re-elected president in June, international investors have lost confidence in the country's economic policies. Mr. Erdogan has appointed his son-in-law as the head of the finance ministry. He's indicated that he's going to appoint personally all the key officials of the central bank. And he's railed against interest rate hikes which are necessary to protect the currency and reduce inflation.
CORNISH: So where does the U.S. come in - because it's not just the tariffs, right? It sounds like the relationship has soured.
PRASAD: The U.S. has certainly put the relationship on a very rocky patch right now. What's happened is that the U.S. has imposed sanctions on Turkey and has used national security considerations to impose tariffs on steel and aluminum imports from Turkey, which as a NATO partner cannot really be considered a security threat. That has added pressure to the economic woes that Turkey has already faced and has made it easy for Mr. Erdogan to point out that maybe it's not just economic policies but foreign adversaries including the U.S. that are now creating the economic pressure that Turkey faces.
CORNISH: I understand that Turkey's not the only so-called emerging market to be worried in this environment. What are some other U.S. policies that are having an effect?
PRASAD: It's basically the increase in U.S. interest rates by the Federal Reserve. Because the U.S. economy is strengthening, that is having a ripple effect in emerging markets around the world. Many of these countries have borrowed a fair bit in international markets and especially done a lot of this borrowing in dollars when dollar borrowing was cheap. Now the chickens are coming home to roost when interest rates in the U.S. are rising, and it's putting pressure on emerging markets around the world.
So what's happening in Turkey is acting as a trigger for international investors to re-evaluate. That leads to some money coming out of the emerging markets, makes the vulnerable ones like Indonesia, Argentina, South Africa even more vulnerable and brings more money to the dollar and strengthens the dollar, which adds to the pressure on these emerging market economies.
CORNISH: Could the EU in some way help out in this situation?
PRASAD: Certainly. Turkey is looking for help from anywhere it can get it. In fact, in a New York Times op-ed, Mr. Erdogan hinted not so subtly that if the U.S. was going to tighten the screws against Turkey, he might look for new friends and allies. And in other discussions, he's talked about Russia, Qatar, China possibly helping him step - stepping in to help Turkey off its economic travails.
CORNISH: What could change the course of things for Turkey without international aid?
PRASAD: What Turkey really needs to do is restore the confidence of international investors. What Mr. Erdogan has done that has really rattled foreign investors is that he has indicated that he is going to maintain control of the central bank. In fact, he's talked about interest rates as the mother and father of all evil. So for a stronger currency and to reduce inflation, you need higher interest rates, as Mr. Erdogan has pointed out that he's not going to let the central bank do this. So he needs to give the central bank more autonomy and show that he's willing to put the economy back on track by not adopting populist policies. He's shown no indication of doing so.
CORNISH: Eswar Prasad is a professor at Cornell University. He's also a senior fellow at the Brookings Institution. Thanks for coming in and speaking with us.
PRASAD: It's been my pleasure, Audie. Transcript provided by NPR, Copyright NPR.