Debt Powered Turkey, Until it Backfired

The president set policy that let his nation gorge on foreign loans, granting his wish of a brawny economic expansion. Now it is paying the price.

The Turkish lira’s fall has been sudden and sharp. The cause traces back nearly a decade when the country’s leader decided to turn Turkey into something resembling China on a smaller scale, a world-class economy under one man’s firm control.

Eager to pull his nation out of an economic contraction that had marred much of the world at the start of 2009, Recep Tayyip Erdogan signed a decree easing access to foreign-exchange loans for Turkish companies.

The new rules lifted restrictions that barred companies without revenue in hard currencies from doing such borrowing—as long as the loans exceeded $5 million. “It was tantamount to saying: If you drink, drink a lot,” said one official in Ankara, Turkey’s capital.

In the following years, Turkish companies gorged on euro and dollar loans, granting Mr. Erdogan’s wish of brawny economic expansion that helped him and his ruling Justice and Development Party power through successive national and local elections. Memories of the 2009 recession evaporated, as did those of the 1990s crisis that had led Turkey to seek international assistance.

Mr. Erdogan was, in effect, mirroring in ways the approach of Chinese President Xi Jinping and his party, which consolidated political power in an authoritarian regime and encouraged heavy borrowing to supercharge the economy.

Turkey’s financial trouble shows the limitation of that approach, especially for countries more susceptible to the forces of global finance and without the kind of control exerted by China’s Communist Party. Vulnerabilities in the Turkish expansion model were so severe it took only two tweets by President Trump in recent weeks—one announcing sanctions against two Turkish officials and another on the doubling of some tariffs—to spark panic.

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