A worker looks toward the control tower of the new airport under construction in Istanbul, Turkey. Heavy spending on infrastructure has fueled the country's prosperity but also left it struggling with debt.
OZAN KOSE/AFP/AFP/Getty Images
A worker looks toward the control tower of the new airport under construction in Istanbul, Turkey. Heavy spending on infrastructure has fueled the country's prosperity but also left it struggling with debt.
(CNN) —  

At the Ayaklı borsa – or standing currency exchange in old Istanbul – seasoned traders still ply their trade on their feet as they have for centuries. They say they have not seen such volatility since 2001, when Turkey faced its last major currency crisis.

Those at Ayaklı borsa described August 11 as “Black Friday,” after a tweet by US President Donald Trump triggered a new round of tariffs on Turkish aluminum and steel, which sent the Turkish lira reeling. From their vantage point at the standing exchange, the lira’s battle is far from over.

“As long as the tension with America continues to be high and Turkey has limited cash reserves, the dollar is open to rise,” veteran currency trader Adnan Kapikaya told CNN in the midst of the noisy calls to place orders.

Turkish President Recep Tayyip Erdogan is seen arriving at the NATO Summit in Brussels last month.
Jasper Juinen/Getty Images
Turkish President Recep Tayyip Erdogan is seen arriving at the NATO Summit in Brussels last month.

Kapikaya is referring to the high-profile spat between Trump and Turkey’s long-serving leader, Recep Tayyip Erdogan. The lira has been caught in the crossfire.

Trump has turned up the heat seeking the release of American pastor Andrew Brunson, who has been held in Turkey on espionage charges since 2016.

Conflict over pastor

With the pressure he has put on Turkey, President Trump has placed that country in the pole position for what is a nasty rush out of emerging-market currencies and into the dollar as the US Federal Reserve winds down nearly a decade of historically low interest rates.

Over breakfast in a café in central Istanbul, bank employee Mehtap Gunal said the near 40% decline in the lira has been difficult to digest as prices for basic foodstuffs continue to rise.

“This has a shock impact on us. We feel it in our kitchens, cafés and on our salaries,” said Gunal. “To see our salary losing its value is scary.”

With a good instinct for the mood on the street, Turkey’s scrappy President has tried to counterpunch each of Trump’s moves. One day he threatened a boycott of US electronics; the next, he doubled tariffs on a long list of American goods – from cars to cosmetics.

US Pastor Andrew Craig Brunson (C), is seen inside a car escorted by Turkish plainclothes police officers  as he arrives at his house last month.
Stringer/AFP/Getty Images
US Pastor Andrew Craig Brunson (C), is seen inside a car escorted by Turkish plainclothes police officers as he arrives at his house last month.

Friends in Russia and Qatar

He also moved into higher gear to shield Turks from the Trump offensive by announcing emergency measures to limit Turkish companies from swapping liras for dollars. Erdogan also went out of his way to send a message to Washington that Turkey has friends.

Russian Foreign Minister Sergei Lavrov visited Ankara, followed a day later by the young Emir of Qatar, Sheikh Tamim bin Hamad Al Thani, who put forth a $15 billion cash injection when Turkey needed it most.

The all-hands-on-deck approach worked to slow down panic selling of the lira, but Turkey’s long-term economic problems won’t vanish overnight after years of prolific spending.

In Taksim Square, a grand mosque taking final shape serves as an example of Erdogan’s construction-driven growth strategy during his 15 years in power.

Zumrut Imamoglu, the chief economist of Turkey’s powerful business association TUSIAD, said local companies and banks are now suffocating under a mountain of foreign debt. After a rapid descent in the currency, the cost of repayment is soaring.

Funding gap

“Corporates and the financial sector and if you include the government debt, they need to find $180 billion of funding for the next year and international reserves at the central bank stand around $100 billion. So, there is a gap and that is what investors have been focusing on,” Imamoglu said.

Imamoglu is forecasting a quick reversal of fortune from what she said was an overheated 7.4% rate of growth in the first quarter to near recession by the close of the year.

She said Turkey’s current account deficit of 5.5%, inflation of nearly 16% and commercial lending rates of 38% make up a toxic economic combination that will implode if Turkey does not turn to the International Monetary Fund for emergency lending, a move Erdogan remains steadfastly against.

Which means over the next year, the livelihood of average Turks and their populist leader will remain closely linked to the tweets of the US President and a rising US dollar.